Here's a seemingly simple question about kiddie tax that I can't find a straight answer to:
Sarah, age 14
Earned income: $5,000
Unearned income: $3,000
Parents' marginal rate: 37%
What's her total tax owed?
Here's my reasoning:
Sarah's standard deduction: $5,000 + $450 = $5,450
Taxable income: $8,000 – $5,450 = $2,550
Amount subject to parents' rate (kiddie tax): $3,000 – $2,700 = $300
Amount subject to Sarah's rate: $2,550 – $300 = $2,250
Total tax: $300 * 37% + $2,250 * 10% = $336
The confusing aspect is that the typical kiddie tax calculation would have $1,350 subject to 10%, yet the alternative standard deduction seems to increase it to $2,250.
What's correct here?
Posted by rukkh
2 Comments
Your total tax calculation is correct (assuming your numbers for the 2025 tax year are correct, I didn’t check those). The first $2700 (or whatever the cutoff. Inner is for the tax year in question) of unearned income are never subject to kiddie tax.
To calculate net unearned income for kiddie tax purposes, the amount that needs to be subtracted is given in 26 USC 1(g)(4)(A)(ii).
>**(ii)**the sum of—
>**(I)**
>the amount in effect for the taxable year under section 63(c)(5)(A) (relating to limitation on standard deduction in the case of certain dependents), plus
>**(II)**
>the greater of the amount described in subclause (I) or, if the child itemizes his deductions for the taxable year, the amount of the itemized deductions allowed by this chapter for the taxable year which are directly connected with the production of the portion of adjusted gross income referred to in clause (i).
For children with no earned income, subclause (I) is their standard deduction (taxed at 0%), and subclause (II) is the same amount (taxed at 10%). They are allowed $1,350 (in 2025) of standard deduction, all of which offsets their unearned income.
For children with earned income, less standard deduction can be allocated to their unearned income, because their earned income takes up more of it. In the case of a child with between $900 and $15,300 (in 2025) of earned income, their standard deduction is their earned income plus $450. Only $450 of their standard deduction can offset their unearned income.
The amount exempt from kiddie tax remains twice the standard deduction for dependents with no earned income.