The Further Consolidated Appropriations Act, 2020 (P.L. 116-94), which was signed into law on Dec. 20, 2019, made a number of dramatic changes that impact the taxation of children. If you are the parent of a minor child, it’s up to you to file an income tax return on their behalf if one is required. Here are some changes of note.

Kiddie Tax

Like adults, children must file a tax return if they have sufficient income to warrant it (filing thresholds change annually and special threshold apply to children who are dependents). For certain children, there’s a “kiddie tax.” This is not a separate tax, but a method of figuring tax on a child’s unearned income over a threshold amount ($2,200 in 2019 and 2020) (Code §1(g)). The nature of the income as being unearned income (e.g., bank interest, dividends, capital gain distributions, and taxable scholarships) controls the applicability of the kiddie tax and not the source of the income (e.g., a gift from a parent or other relative or investment return on a child’s earned income). The purpose of the kiddie tax, which was introduced by the Tax Reform Act of 1986, is to prevent parents from shifting investment income to children as a way to reduce the overall tax bill for the family.

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