- The kiddie tax means that income from investments gains earned by a child from a gifted stock will be taxed at the parent’s tax rate, not the child’s tax rate.
- The kiddie tax applies to interest income, dividends, and capital gains, but it does not apply to earned income, like wages from a job.
- Opening a custodial or joint account where the minor is the beneficiary is one way to set up the gifting process.
- Once a child reaches the age of majority, the gifted stock will be taxed at the child’s rate
If you are considering gifting stocks to minors – whether its your child, grandchild or another loved one, it is important to understand the ‘kiddie tax.’
Let’s take a look at what you need to know about the ‘kiddie tax’ and how to navigate the tax eliminating any tax surprises.
The kiddie tax means that income from investments – like dividends, interest, or capital gains earned by a child from a gifted stock will be taxed at the parent’s tax rate, not the child’s tax rate.
This means, if you gift a stock to a child and it generates income, the ‘kiddie tax’ kicks in, and the income will be taxed at the parent’s higher tax rate.
The idea is to prevent parents from shifting investments to their children to take advantage of their lower tax bracket.
The kiddie tax applies to interest income, dividends, and capital gains, but it does not apply to earned income, like wages from a job.
“So, what can you do to avoid this issue?
If you’re thinking of transferring stocks to a minor, you’ll want to plan ahead. You can open a custodial account or a joint account where the minor is the beneficiary.
Once the child reaches the age of majority in your province (usually 18 or 19), the kiddie tax will no longer apply, and the income will be taxed at the child’s rate.
Gifting stocks to a minor can still be a great way to help them build wealth, but understanding the tax rules—like the kiddie tax—can help you make better decisions and avoid surprises.
Check out ‘How to Gift Stocks‘ on Stockhouse.com
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