Parents, grandparents, and other relatives love to give children things like stock, bonds, mutual funds and savings accounts. This property generates investment income - interest, dividends and profits from asset sales. It called "unearned income" because the earner didn't actually have to work at a job or business to make the money.
Although, your child doesn't have to pay tax upon receiving the a gift, the child will be responsible for paying tax on any unearned income the property generates. How this investment income is taxed depends on the childs age - the rules change for children who turn 19 before the end of the year.
Children under 19 don't have to report or pay any tax on their first $900 of income for the year. Their minimum standard deduction is $900. That makes giving children income-producing investments a good strategy for creating a modest amount of tax free income.
If a child under 19 earns between $900 and $1800 in investment income, the child becomes subject to the kiddie tax. Any investment income over $1800 is taxed at the parents highest income tax rate. which can be as high as 35%.
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