First below is the basic information about what Kiddie tax is (this is from irs.gov)?

If the child’s interest, dividends, and other investment income total more than $2,000, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. See Form 8615 Instructions, Tax for Certain Children Who Have Investment Income of More Than $2,000.

Part of a child’s investment income may be taxed at the parent’s tax rate if:

1. The child’s investment income was more than $2,000
2. The child meets one of the following age requirements:
   • The child was under age 18 at the end of the tax year
   • The child was age 18 at the end of the tax year and the child’s earned income does not exceed one-half of the child’s own support for the year, or
   • The child was a full-time student who was under age 24 at the end of the tax year and the child’s earned income does not exceed one half of the child’s own support for the year (excluding scholarships)
3. At least one of the child’s parents was alive at the end of the tax year
4. The child is required to file a tax return for the tax year, and
5. The child does not file a joint return for the tax year

Fascinating

Okay, now with the basic definition of what Kiddie tax is, here are the reasons that I think that kiddie taxes could be a cause of wealth inequality.

1. To be taxed at your parents rate is punitive and teaches young student that investing is bad.  Teaching that investing is bad to young people encourages them to miss out on one of the greatest wealth builders in the United States.
2. Another huge disensentive is the tedious and complex tax filing consideration.  Why even try?  Young Adults have enough complexities with live without this complex and head ache of a rule.  Why even try?
3. It’s hard enough for kids to divert money from spending on fun things to know that the government a huge bite out of the earnings right away.  Again, why even try?

In conclusion, I have to believe that the Kiddie tax does more harm that good.  Perhaps the government should re-evaluate the way that they are discouraging the young to consider investing because of the Kiddie Taxes (after all a 23 year old is pretty old and not a kid anymore).

It’s sad that we complain that kids aren’t being taught finances in school on one hand, but then in the other hand our taxing system is screwing young adults if they decide to go that route.  Where is the fairness here?

At a very minimum, the threshold amount should be raised from $2,000 to $5,000.  At $5,000 it’s not entirely fair either, but at least it’s less of a disinsentive to participate in the greatest wealth builder in America (ask Warren Buffett).  And to think of all of those projections that say “start early”, but I wonder how many of those projects calculate the huge tax bite that the government may take out of their investment projection models?

I think it a horrible lesson for our youth, and the pros (teaching kids to invest) outweigh the cons (bad folks taking advantage of their kid’s brokerage accounts for tax purposes.  Besides, these days the government can detect such transactions that are questionable…  I wonder if the government even realizes the potential harm they are doing on kids and young adults?

I write a lot of what I consider unique things (or at least I think them), and I sometimes worry about others might copying my content… but this is one area that I would gladly allow to be paraphrased, and even encourage it!

What do you think? 

Don