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Children are taxpayers in their own right for any income they earn and for their investment income.
Once they reach the age of 14, their separate tax status may permit a significant amount of investment income to be taxed at rates that may be significantly below the rates that apply to their parents. Special rules apply for taxation of children's investment income while they are under age 14. The balance of unearned income is taxed to the child as if it were the parents' income. The tax is calculated by determining what the parents' tax would be if the child's net unearned income were added to the parents' taxable income. As a result, some of the child's income may be subject to tax at rates as high as 39.6 percent.