What tax rate applies to the first $2,600 of a child’s unearned income?

For the first $2,600 of a child’s unearned income, the correct tax treatment is that it is subject to a zero tax rate. This is due to the "kiddie tax" rules, which were designed to prevent parents from shifting income to their children to take advantage of lower tax rates.

The first $1,150 of a child's unearned income is completely tax-free, and the subsequent $1,450, which brings the total to $2,600, is also taxed at a zero rate. This means that a child may effectively earn up to that amount without incurring any tax liability. Such provisions aim to provide relief for families and ensure that modest amounts of unearned income do not create excessive tax burdens on young earners.

The income above this threshold is then subject to higher tax rates, starting from 10% for amounts exceeding the $2,600 limit, which fits within the progressive tax system, where higher income levels are taxed at increasing rates. Understanding these thresholds and tax rates is critical for effective tax planning for families with children who have unearned income.