The Kiddie Tax

Explore the kiddie tax rules and their implications on parents’ ability to transfer investment assets to their children and learn about tax planning strategies to optimize your tax situation.

Presented by: Scott Portlock, CFP®, CLU®

The IRS’s kiddie tax rules limit parents’ ability to transfer investment assets to a minor child in order to take advantage of the child’s lower marginal tax bracket.

The kiddie tax applies to the following groups:

• Children younger than 18
• Children aged 18 whose earned income does not exceed one-half of their support
• Children at least age 19 but younger than 24 who are full-time students and whose earned income does not exceed one-half of their support (A student is considered full-time if he or she is a full-time student during any part of at least five months during the year.) 

Tax Planning Strategies That Can Help Mitigate the Kiddie Tax

• Consider investments that potentially generate tax-exempt income, such as municipal bonds*; investments that defer tax, such as U.S. savings bonds; or growth-oriented stocks and growth securities.
• If taxable investment income is below the indexed threshold, consider electing to report U.S. savings bond interest each year.
• If the child has earned income, consider investing the assets that are generating taxable investment income in a Roth IRA. Roth IRA-qualified distributions generally aren’t subject to income tax.

If you decide on the third option, bear in mind that your contributions are not tax deductible because you can invest only after-tax dollars in a Roth IRA. If you meet certain conditions, your withdrawals will be free from federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement and one of the following must apply:

• You have reached age 59½ by the time of the withdrawal.
• The withdrawal is made because of disability.
• The withdrawal (of up to $10,000) is made to pay first-time homebuyer expenses.
• The withdrawal is made by your beneficiary or estate after your death. 

*Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT).

Learn about building an asset protection plan.

Check out these carefully curated tax strategies in our guide.

Find out more about municipal bonds and investing in the long term.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Scott Portlock is a retirement plan advisor located at Global Wealth Advisors 500 N. Loop 1604 E., Suite 250, San Antonio, TX 78232. He offers securities and advisory services through Commonwealth Financial Network^®, Member FINRA  / SIPC, a Registered Investment Adviser. Financial Planning services through Global Wealth Advisors are separate and unrelated to Commonwealth. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network^®. He can be reached at (210) 745-6393 or at info@gwadvisors.net.

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