Kiddie tax, household employees, and foreign accounts

A grandparent’s gift of stock turns into a child’s tax return at the parents’ rate. The aide who comes three days a week to help with Dad turns the family into an employer. An account kept open in the old country turns into a filing with the Treasury that has nothing to do with tax. Each rule is simple once stated; each is missed because nobody expects it.

The kiddie tax

This is the rule that stopped parents from parking investments in their children’s names to use the children’s low rates. It applies to a child’s unearned income: interest, dividends, capital gains, and distributions from an inherited IRA. Wages are not touched. For 2026 the first $1,350 is not taxed, the next $1,350 is taxed at the child’s own rate, and everything over $2,700 is taxed at the parents’ rate, computed on Form 8615 on the child’s return. It covers every child under 18, and a child who is 18, or a full-time student from 19 through 23, unless the child’s own earned income paid more than half of their support.

A custodial account (UTMA or UGMA) is where it bites. Every dollar of interest, dividends and gains the account produces is the child’s income, and a growth fund held for years can throw off a large gain the year the custodian rebalances, taxed as if the parents had sold it. Giving appreciated stock to a child to sell at a low rate does not work either: the gift carries the parents’ basis, and the gain above $2,700 lands at the parents’ rate anyway. If the child’s income is only interest and dividends and totals less than $13,500, the parents may elect on Form 8814 to report it on their own return and skip the child’s. It saves a filing, but it raises the parents’ AGI and usually costs a little more.

Household employees

If you pay someone to work in or around your home and you control how and when the work is done, that person is your employee. The IRS calls it the nanny tax; nannies are a minority of the cases. A caregiver you hired directly for an aging parent, a housekeeper on set days, and a yard worker you pay by the hour are employees. Agency staff, a cleaning company with other customers, and a contractor hired for a job are not. The test is control, whatever you both call it and whether the worker is part-time, paid in cash, or a friend of the family.

Exempt from FICA and FUTA: wages to your spouse, your child under 21, and in most cases your parent (with exceptions when the parent is caring for your young or disabled child), and students under 18 for whom the job is not their principal occupation. An adult child over 21 you pay to care for you is a regular household employee.

It all rides along with your own Form 1040 on Schedule H; there is no separate business return. You need a free employer ID number from the IRS, a W-2 for the worker by January 31 and a W-3 to Social Security, and the Colorado registration. The year’s FICA and FUTA are totaled on Schedule H and added to your own tax, so raise your withholding or make an estimated payment so the bill does not land all at once. The risk of ignoring it is not usually an audit. It is the day the relationship ends: the caregiver files for unemployment and the state finds no employer account, or the nanny applies for Social Security and has no earnings record. Each leads back to you, with back taxes, penalties and interest for every year.

Foreign accounts

Every organizer asks whether you have a financial account outside the United States, or signature authority over one. If the accounts together were worth more than $10,000 at any point in the year, they must be reported on FinCEN Form 114, the FBAR, filed online with the Treasury separately from the return, by April 15 with an automatic extension to October 15 (verify). Larger holdings also go on Form 8938 with the return, at thresholds starting at $50,000 for a single filer living in the U.S. (verify). It is a reporting rule, not a tax; the income is taxed like any other and belongs on the return. The penalties for not reporting are what hurt: $10,000 or more per year for a non-willful miss (verify), far more if willful. Accounts that count include bank and brokerage accounts, foreign pensions in many cases, and an account you can sign on for a parent abroad. Foreign real estate held directly does not.