Academic journal article Journal of Accountancy

Kiddie Tax Complexity Grows

Academic journal article Journal of Accountancy

Kiddie Tax Complexity Grows

Article excerpt

The "kiddie tax" was enacted in 1986 as what was intended to be a simple-enough mechanism to prevent a small number of wealthy parents from shifting income-producing assets to young children who were in lower tax brackets. One reason the kiddie tax originally applied only to children age 14 and younger was to minimize complexity. The assumption was that few children under 14 would have substantial earned income or complicated financial situations.

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Even so, almost immediately after enactment--and years before the age was raised--there were calls to reduce its complexity. The later increases in the age from 14 to 23 caused an explosion in the number of taxpayers required to deal with the complexity. While there is no exact way to measure that complexity, it is telling that the 34-page IRS Publication 929, Tax Rules for Children and Dependents, devotes at least 20 pages, rife with worksheets, to the taxation of dependents with investment income.

Complexity begins with the option for parents to "simplify" matters by allowing them to include the child's income on the parents' own return instead of filing a separate return for the child. First, the option permitting parents to include the income on their own returns has limitations that must be identified: The child's investment income can consist of only interest, dividends, and certain capital gain distributions, and it cannot exceed a certain limit that changes from time to time. In addition, no estimated tax payments can have been made in the child's name, and the child must not be subject to backup withholding. Furthermore, the election to include the income on the parents' return may have negative tax consequences. …

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