This situation directly relates to the SECURE Act Kiddie Tax Changes for Gold Star Children & Others which was passed in late Dec 2019 (see below). I just don't know how to get Lacerte to reflect the correct (parent/individual) tax rate and not the trust/estate rates per Code Sec. 1(j)(4) , as amended by Act Sec. 501(a)). Can someone help?
Background:
New law. The SECURE Act repeals the kiddie tax measures that were added by the TCJA. As a result, the unearned income of children is taxed under the pre-TCJA rules and not at trust/estate rates. ( Code Sec. 1(j)(4) , as amended by Act Sec. 501(a))
Observation Under the Act's version of the kiddie tax, a child will once again be taxed at the
parents' rates on net unearned income if higher than the child's rates.
Observation This provision applies to all children who are subject to the kiddie tax, not just to
Gold Star children. However, it will particularly benefit children who receive payments under the
Survivor Benefits Plan (SBP), an insurance annuity provided by the Department of Defense. SBP
payments are often assigned to a child by a surviving spouse who is receiving Dependency and
Indemnity Compensation (DIC) from the Department of Veterans Affairs. This is done to avoid a
rule that requires DIC paid to a spouse to be subtracted from the spouse s SBP payments.
SBP payments are taxable and are unearned income for kiddie tax purposes. Before the TCJA
changes, the kiddie tax didn't take a large bite out of SBP payments, because the surviving parent
usually wasn't in a high tax bracket. Under the TCJA, the child's net unearned income was taxed at
trust and estate rates, which reached the top rate of 37% at taxable income over $12,500 for 2018.
As a result, some Gold Star children who received SBP payments saw a sharp increase in their tax
bill for 2018.
The Act also eliminates the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income. ( Code Sec. 55(d)(4)(A)(iii) , as amended by Act Sec.
501(b))
Effective: Tax years beginning after Dec. 31, 2019 (Act Sec. 501(c)(1)), but taxpayers can elect to apply it retroactively to tax years which begin in 2018, 2019, or both. (Act Sec. 501(c)(3))
Observation To decide whether to make this election, taxpayers should compare the tax for
2018 under the TCJA rules with the tax under the pre-TCJA rules that were reinstated by the Act.
Which set of rules provides the better result depends on the parents marginal rate and the amount
and type of the child's income. Taxpayers who have already filed for 2018 and who would benefit
from the election should file an amended return.
The AMT exemption amount change applies to tax years beginning after Dec. 31, 2017. (Act Sec.
501(c)(2))
As a side note, the SBP-DIC offset is being phased out from 2021-2023, so this will no longer be necessary to have the child be the beneficiary of SBP. The SBP benefit will supposedly automatically revert back to the spouse in 2023.
