Applicable Tax

The kiddie tax applies once your child has has an investment income that is more than double the amount allowed as a standard deduction for a dependent. For 2009, the standard deduction was $950, so the kiddie tax kicks in once the child's investment income exceed twice that, or $1,900. The tax does not apply to income earned by the child through part-time or full-time employment.

Reporting the Tax

There are two ways in which you can report the kiddie tax on your taxes. One way is to include it on the parents' return. The other way is to file a return for your child and include Form 8615. Even though the tax is calculated at the parents' rate, it is still the child that owes the tax.

Tax Rate

The first $950 is tax free, the second $950 is taxed at a rate of 15 percent. Anything over $1,900 is taxed at the parents' rate, which can be as high as 35 percent.

Reason for the Tax

Part of the reason why this tax was created was to prevent wealthier parents from taking advantage of another tax, which is the zero percent capital gains on lower-income investors.

College Savings

Parents who were saving for their child's college tuition using a custodial account are also affected by the kiddie tax and are subject to the same income limits. Now, 529 plans exist and are not affected.

Source:

Tax Guide for Investors

Bankrate.com

Tax Time

Resource:

Tax Guide for Investors