A child with earned income (wages and other compensation) in excess of the filing threshold is a separate taxpayer who is generally taxed as a single taxpayer.in one of the following categories has unearned income (i.e., investment income) in excess of the "threshold amount" ($850 in 2007 or $900 in 2008) that unearned income is taxed at the parent's marginal tax rate, as if the parent received that additional income (the so-called "kiddie tax"):

• a child under the age of 18 (14 prior to 2006);
• an 18 year-old child who provides less than half of his or her support with earned income (for tax years after 2007); or
• a 19 to 23 year-old student who provides less than half of his or her support with earned income (also only for tax years after 2007).

If the child's unearned income is less than an inflation-adjusted ceiling amount ($8,500 in 2007 and $9,000 in 2008), the parent may be able to include the income on the parent's return rather than file a separate return for the child (and which the tax based on the parent's marginal rate bracket is computed on Form 8615).

Any distribution to a child who is a beneficiary of a qualified disability trust is treated as the child's earned income for the tax year the distribution was received.

Example:  Greta is a 16 year old whose father is alive. In 2007, she has $3,000 in unearned income, no earned income, and no itemized deductions. Her basic standard deduction is $850, which is applied against her unearned income, reducing it to $2,150. The next $850 of unearned income is taxed at Greta's individual tax rate. The remaining $1,300 of her unearned income is taxed at her parent's allocable tax rate. Assuming that is 25 percent, her tax on the $1,300 is $325.