The Kiddie Tax and Scholarship Income: An Analysis of the Unforeseen Tax Consequences Resulting from the Evolution and Execution of IRC 1(g) and a Roadmap for Reform

Abstract

ABSTRACT One of the changes contained in the Tax Reform Act of 1986 is the tax on unearned income of minor children, also known as the “kiddie tax.” We review this tax, its legislative history, the amendments and interpretations that have enlarged its application, and the unintended consequences that resulted from the expansion of the kiddie tax to young adults up to the age of 24, specifically as it applies to taxable scholarship income. Many college students whose higher educations are heavily subsidized by scholarships may face significant tax burdens as a result of the kiddie tax. This reality is not in line with the congressional intent of curtailing tax avoidance through shifting ownership of income-producing assets. We provide examples of the tax's impact, and we conclude by offering potential solutions that protect the public fisc while reducing the negative and unintended consequences created by expansion of the kiddie tax.