Don’t Be Surprised by This ‘Kiddie Tax’ If Your Adult Children Dabble in Stocks, Cryptocurrency

by Victoria Santiago
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If your teen or adult child in college has been trading stocks or cryptocurrency, don’t be surprised if you get hit with a “kiddie tax.”

This tax is an extra levy for parents once their child’s investment income (capital gains, dividends, and interest) exceeds a certain amount.

Before the kiddie tax existed, higher-income parents could move assets to their children’s accounts in order to pay lower taxes on earnings. However, the IRS has since cracked down on this practice. The tax can apply to children under the age of 18, and even full-time college students under the age of 24. That’s right, Outsiders. Even if your kid has flown the coop, you could still see the effects of parenthood come tax time.

The ‘Kiddie Tax’ Threshold

For example, let’s say that a 22-year old full-time college student made $5,000 from investing in stocks. The first $1,100 of that profit is tax-free. However, the student will owe levies on the next $1,100 at their rate. Beyond that amount, any investment gains will get taxed at the parent’s rate.

Any profit above $2,200 will be subject to kiddie tax, and the parents will be on the hook for it. Of course, that’s assuming that the student is still a dependent on their parent’s tax return. In this example, the parents would end up paying levies on $2,800 of their child’s investment income.

The deadline for brokerages to send Form 1099-B was February 15. Form 1099-B focuses on the gains and losses of each investment account. This form will give you insight into any potential kiddie tax you may owe.

Protect Yourself From Investment Levies In the Future

If you do owe this tax, there aren’t that many ways to reduce your bill before the tax season is over. (This year it’s extended until April 18, by the way.) However, there are things you can do to protect yourself from future investment levies.

If your teen or college student-aged child does invest in stocks or crypto, there are other options. You could encourage your kid to invest in a Roth IRA instead. Of course, that’s only if they have “earned income” or funds from a part-time job. If they don’t have earned income, they might need to hold investments long-term in taxable accounts.

A Roth IRA still gives teens investment flexibility without being costly in the long run. They’ll have access to any contributions penalty and tax-free, according to CNBC. On top of that, they can treat their Roth IRA as a savings account. That way, we’re sure they’ll be way ahead of their peers when it comes to retirement money.

Either way, the best thing to do to avoid any surprises is to talk to your accountant. If your children are getting into investing, some professional advice can never hurt.

Outsider.com