Investing in tax-exempt or tax-deferred type of investments to avoid Kiddie Tax.

Since the Kiddie Tax applies only to unearned income of a child under 24 years of age, one option for avoiding the Kiddie Tax is to invest the child’s assets in investments that produces tax-exempt or tax-deferred income until after the child reaches age 24. Investments that produce these types of income may include municipal bonds, Series EE savings bonds, growth stock, annuities, and life insurance. However, the tax-efficient use of the child’s return would suggest that the child can absorb at least $2,100 of taxable unearned income annually.