Question 1

What is the kiddie tax and how does it apply in Florida?

Accepted Answer

The kiddie tax is a federal tax rule (IRC Section 1(g)) that taxes a child’s unearned income above a threshold at the parent’s marginal tax rate instead of the child’s (presumably lower) rate. The rule prevents parents from shifting investment income to children to take advantage of lower tax brackets. Under the current rules, an initial amount of unearned income is tax-free (covered by the child’s standard deduction), the next tier is taxed at the child’s rate, and unearned income above the combined threshold is taxed at the parent’s rate. These threshold amounts are adjusted annually for inflation. The rule applies to children under 18, children aged 18 who do not provide more than half their support, and full-time students aged 19-23 who do not provide more than half their support.

Question 2

How does the kiddie tax affect Florida real estate and estate planning?

Accepted Answer

Florida-specific impacts: since Florida has no state income tax, Florida families already benefit from reduced overall tax burden. However, the kiddie tax affects: custodial accounts (UGMA/UTMA) that hold investment property or rental income, trusts for minors that generate rental income from Florida investment properties, family partnerships or LLCs where children are members and receive distributions, and 529 plan alternatives (families may consider tax-advantaged education savings instead of custodial accounts). Estate planning strategies: instead of transferring income-producing assets to children, Florida families may use: qualified personal residence trusts (QPRTs), 529 education savings plans, Roth IRAs (if the child has earned income), and irrevocable trusts designed to minimize kiddie tax exposure.

Question 3

How is the kiddie tax calculated for Florida families?

Accepted Answer

Calculation: (1) Determine the child’s total unearned income (interest, dividends, capital gains, rental income, trust distributions). (2) Subtract the dependent standard deduction. (3) The next tier above the deduction is taxed at the child’s rate (10% for the lowest bracket). (4) Everything above the combined threshold is taxed at the parent’s marginal rate (which could be as high as 37%). Because part of the income is taxed at the parent’s higher rate rather than the child’s, the total tax is greater than it would be if the entire amount were taxed at the child’s lower rate. The threshold amounts are adjusted annually for inflation, so the current figures should be confirmed for the relevant tax year.

Kiddie Tax Minors Unearned Income Tax Rule

Kiddie Tax Rules for Florida Families

Who It Applies To

How It Works

Florida Estate Planning Impact

Related Terms

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