Last week we talked about income and payroll taxes for a student who works and earns income This week, let’s talk about a student’s unearned income.

For many years, high-income families would funnel unearned income through their children’s social security numbers as a way to save on paying taxes. This led to the Kiddie Tax in the 1980s. This taxed children’s unearned income at a very high rate. Fast forward to 2017…the Tax Cuts and Jobs Act (TCJA) makes some big changes to the Kiddie Tax starting this year (2018.)

The Kiddie Tax applies only to unearned income a child receives from income-producing property (or investment property,) such as cash, stocks, bonds, mutual funds, etc. It does NOT apply to any salary or wages that a child earns through a job…that income is taxed at the regular income tax rate.

Prior to 2018, children could pay their own income tax rate on unearned income, up to a threshold of $2,100. All unearned income above that amount was taxed at their parent’s highest income tax rate.

Starting in 2018, the TCJA changes the rates for the Kiddie Tax. Children’s unearned income over $2,100 will be taxed using the brackets and rates for trusts and estates. These are shown on the following chart:

Kiddie Taxable Unearned Income Tax Rate
Up to $2,550 10%
$2,551-$9,150 24%
$9,151-$12,500 35%
Over $12,500 37%


These rates can be higher than the parent’s rate, which would have been applied under the previous law.

With these changes, it’s important to keep track of children’s unearned income to make sure they avoid the highest bracket.

To discuss the Kiddie Tax, contact an HW&Co. tax professional…let’s talk.