The kiddie tax is a tax on unearned income paid to minors. The kiddie tax was designed to target wealthy parents who were shifting income-producing assets to their children, who were usually subject to lower tax rates.

For 2016, generally the first $1,050 of such income is tax free, the second $1,050 is taxed to the child at his/her tax rate and all unearned income over $2,100 is taxed at the parents’ tax rate, which could be as high as 39.6%.

In recent years, the IRS has expanded the kiddie tax so that it’s applicable to the unearned income of much older children (it used to apply to children under the age of 14—now it applies to children under the age of 19 and also to full-time college students under the age of 24).

The kiddie tax applies only to unearned income a child receives from income-producing property (or investment property), such as cash, stocks, bonds, mutual funds and real estate.

Any salary or wages that a child earns through full- or part-time employment are not subject to the kiddie tax rules—that income is taxed at the child’s tax rate.