Attention parents…thinking of making a financial gift to your children? As we covered in our blog, Kiddie Tax Rules Change under the TCJA, December 2017’s huge tax overhaul changed the rules regarding this tax…but as of December 20, 2019 the old kiddie tax rules are back (thanks to the SECURE Act). Here’s what you should know.

What is the kiddie tax?

The kiddie tax was designed to prevent parents from lowering the family’s tax bill by transferring income-producing assets to children in lower tax brackets. Prior to TCJA, the first $1,100 of a child’s unearned income (dividends, interest and capital gains) could be earned tax-free, and the next $1,100 would be taxed at the child’s rate. Anything over $2,200 was to be taxed at the parents’ tax rate instead of the child’s generally lower rate.

Generally, the kiddie tax applies to all children age 18 or younger, as well as to full-time students who are between 19 to 23 years old and whose earned income is ≤ 50% of his/her support.

What did the TCJA change?

The TCJA retained the general idea of the kiddie tax but, instead of being taxed at the parent’s marginal tax rate, the child’s unearned income would be taxed at the federal income tax rates applicable to trusts and estates. The rule was put in place to deter parents from pushing certain types of income into their children’s lower tax rates. The trust and estate income tax rates rise very quickly and reach the top rate (37%) at just $12,750 of taxable income.

2020 update

As of December 20, 2019, the old kiddie tax rules have been reinstated. That means that any income subject to the kiddie tax (investment or unearned income) will now be taxable at the parents’ marginal tax rate

Why?

The TCJA change created some unintended and negative consequences.

This includes:

• Each dollar amount of the income bracket for estates and trusts is much smaller, and the maximum tax rate is reached at a lower income level (when compared to the brackets and tax rates for individuals).
• Governmental payments received by children of deceased military personnel, first responders and emergency medical doctors are considered unearned income and subject to the kiddie tax, a change Congress felt was unfair.

In response, Congress decided to go back to the old rules.

When is the change effective?

The old rules are effective for tax years beginning in 2020. However, taxpayers do have the option to apply the old kiddie tax rules to returns filed for the 2019 tax year and amend 2018 if warranted.

When filing children’s returns this year, you’ll want to calculate using both methods to see which results in the least amount of tax owed. If your child has significant unearned and investment income in 2018, it may be worth a look to see if filing an amended 2018 return would yield a refund.

Questions on the impact of the kiddie tax on your personal situation? Contact us.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.