Do you have one of “those kids” in your life that is making you feel like they are going to be a CEO someday? We all know the kid. The barter and trade their snacks at school, sell artwork and water as a side-hustle, and are always keeping an eye on their own piggy banks. We love the idea of introducing all children to investing as early as possible, but there can be some tax ramifications IF your young Warren Buffett is making too much money.

The Kiddie Tax is imposed on individuals under 18 years old or dependent full-time students under 24 whose investment and earned income is higher than the annually determined threshold. In 2024, unearned income (dividends, interest, capital gains) under $1,300 is taxed at the child’s marginal tax rate. Then, all amounts over $2,600 are taxed at the greater of the child’s or parents’ tax rate (10-37%).

The rules have changed several times since the Kiddie Tax was created in 1986 and were revised as recently as 2020. Parents and grandparents were effectively giving stocks and bonds to their children (grandchildren) to avoid the taxes on the income being generated by those investments. That strategy has been effectively shut down if your child earns more than $2,500 on their investments.

But it’s okay for them to pay taxes IF they are making money. It might be a good lesson to learn that the more we make, the more taxes we pay (now, or later, or at death)!?

Next up: Replay of our Live Webinar: CREATING A TAX-FREE LEGACY FOR YOUR HEIRS

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.