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Tax Issues of Gifts to Children - the
Kiddie Tax
Consider the Tax Consequences First
Parents give their children gifts all the time. Did you
ever consider the tax consequences of a gift prior to giving it? In most
cases, there are none. However, if income-producing property is given as a
gift, the tax burden shifts to the donee. If the donee is a child under
the age of 14 and has unearned or investment income of more than $1,500,
special rules apply -- often called the Kiddie Tax.
What is commonly referred to as the “kiddie tax rules” make an under-14
child’s unearned or investment income taxable at the parent’s highest
marginal rate, not at the child’s tax rate. The unearned income of a child
includes income produced by property given as a gift to the child,
including gifts given by grandparents or any other person and gifts made
under the Uniform Gifts to Minors Act (UGMA) or under the Uniform Transfer
to Minors Act (UTMA), whether or not that income is distributed to the
child. In most cases, the income from these gifts is in the form of
interest and is taxable to the child at the parent’s higher rate.
Types of gifts that a child might receive that generate investment income
potentially subject to the kiddie tax are U.S. savings bonds, cash (if
placed in, for instance, a savings account bearing taxable interest), and
shares of stock.
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