Special rules commonly referred to as the “kiddie tax” rules apply when a child has unearned income (for example, investment income). Children subject to the kiddie tax are generally taxed at the parents’ tax rates on any unearned income over a certain amount. For 2021, this amount is $2,200 (the first $1,100 is tax free and the next $1,100 is taxed at the child’s rate). The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
Note that the kiddie tax rules apply regardless of whether the child is your dependent. Further, the definition of a child includes your legally adopted child and your stepchild.
You should note that a child who has significant tax exempt interest, or tax preferences or adjustments, may be subject to the alternative minimum tax.