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How Can You Reduce Your Kiddie Tax Liability for 2024?

April 23, 2024

Parents…have you considered the impact of the “kiddie” tax? If you’re not cautious, you can be subject to a sizable income tax liability. Learn more.

The “kiddie” tax is an often-misunderstood tax provision. How can you mitigate the impact of this tax? We explore here.

What Is the Kiddie Tax?

Check out our blog, Understanding the Kiddie Tax Rules. Under IRS rules, for 2024, the first $1,250 of a child’s unearned income (dividends, interest and capital gains) is earned tax-free. The next $1,250 is taxed at the child’s rate. Anything over $2,500 for 2024 is taxed at the parents’ tax rate instead of the child’s typically lower rate.

Generally, the kiddie tax applies to children 18 or younger, as well as full-time students between 19 to 23 years old and whose earned income equates to 50% or more of his/her support.

How can you reduce or eliminate your kiddie tax liability?

  1. Encourage your child to establish a Roth IRA. In 2024, a child can contribute up to $7,000 or their earned income for the year, whichever is lower, and withdrawals can be made tax-free during retirement. Early withdrawals before age 59½ may incur a 10% penalty tax unless an exemption applies.
  2. Check unearned income received during the year. You might consider deferring capital gains to next year if your child is nearing the $2,500 threshold. You can also delay gifts of income producing property.
  3. Encourage your child to engage in tax-deferred investments. These may involve growth stocks, U.S. Savings Bonds, certificates of deposit (CDs), and Treasuries with maturity dates extending into the next year or beyond.
  4. Encourage your child to invest in municipal bonds or municipal bond funds. Typically, income from these investments is entirely exempt from federal income tax, mitigating any potential issues with the kiddie tax.
  5. Consider hiring your child. Depending on your state’s laws, children can be hired as early as age 14. Wages earned constitute legitimate income, thus avoiding complications with the kiddie tax. If the child receives a reasonable salary for services rendered, your company can deduct these wages.
  6. Direct your child's earnings towards a Section 529 plan account. Distributions used for qualified higher education expenses are tax-exempt. Additionally, many states offer tax benefits for contributions made to 529 plans.

Questions? Contact us.

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