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Times are tough and even your kids could use an extra buck. So maybe this year, rather than buying the children holiday gifts, you're thinking of giving them cash. If so, and you have a lot to spare, beware the kiddie tax.
This is a tax on a child's unearned income. It exists so that parents will not shift funds to children just so that the money will be taxed a lower rate. As such, it requires that gifts over $2,000 be reported on either the child or parent's taxes, and it can apply to children over 18. Let's look at the details.
The Internal Revenue Service refers to the kiddie tax topic in its section "Tax on a Child's Investment Income." But the tax actually applies to any unearned income over $2,000 that a child receives in a given year.
Children can have unlimited earned income. But money that is received as a gift and exceeds the limit of $2,000 is taxable at a higher rate if your child is an applicable age.
Although children are officially adults at 18, parents may continue to report them as dependents. For this reason, the kiddie tax age obligations are slightly complicated.
According to Turbo Tax, it applies as follows:
If you have questions about taxes, investments, or estate planning, talk to a lawyer. Consulting with counsel will ensure that you have covered all the rules.
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