The kiddie tax is a tax rule that is levied on unearned income (interest, dividends and capital gains) earned by children under the age of 19 and full-time college students under the age of 24. For 2016, all of the child’s unearned income in excess of $2,100 is taxed at the parent’s tax rate.
In 2016, the only way that college students under age 24 will be able to avoid the kiddie tax is if they provide over half of their own support from their own earned income (i.e., wages and salaries, not income from selling stocks) in which case the child’s unearned income would be based on the child’s tax rates, not the parents rates under the kiddie tax rules.
So, is there a way to avoid paying this tax? Yes, there are several ways including using 529 plans and life insurance. Life insurance you say? Yes, and it works well.
Permanent life insurance allows you to put away funds in the cash-value portion of the policy, which accumulate tax deferred until they are withdrawn or borrowed from the policy. The rates of return over a 15 to 20 year period can be better than other safe money investments equivalents such as CDs and money markets and, there is no current taxation.