Kiddie Tax General Rules
Unearned income. Unearned income is generally all income other than earned income. It includes investment-type income such as taxable interest, dividends, capital gains (including capital gain distributions), rents, royalties, taxable Social Security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and unearned income received as the beneficiary of a trust. Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
Nontaxable income. Unearned income includes only amounts the child must include in gross income. Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of Social Security and pension payments, is not included in gross income.
Capital loss. A child’s capital losses are taken into account in figuring the child’s unearned income. Capital losses are first applied against capital gains. If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child’s interest, dividends, and other unearned income. Any difference over $3,000 is carried to the next year.
Read more: Kiddie Tax 2021