Kiddie Tax Question for 2019

[jshoag27]

Using ProSeries Basic here is the scenario

Mom and her kids live under same roof as mom's parent. (1 address = all 5 people)

Grandparents of kids and parent of  Divorced Mom with 2 kids in the house

Mom of 2 kids has no income for 2019

Kids receive in 2019 50% of deceased father's pension plan = use 108K each gross, with 20% mandatory w/h fed tax - code 4 on the 1099-R for each.  Also each kid gets SSA Money from deceased father for say 5K each with no fed withholding.  Father died 2018. Mom was divorced at the time and he made the kids beneficiary even though they were minors at 50% each.

Kids birthdays are 11/01/2002 (17) and 3/1/2001 (18) at end of tax year 2019.

Kids have no earned income.  Mom has no earned income. Grandparents are supporting all 3: mom and 2 kids and themselves.  Filed Grandparents return just on the 2 grandparents alone in 2019 as normal with no dependent grand kids this time.

Form 8615 gets massively complicated due to the kids age of 17 and 18 and as well as the parent (mom) had no reportable income.

Had the parent called me to let me know she was going to take disbursement I would have recommended a trustee to trustee Inherited IRA for each child with a legal trustee appointed by the probate court to care for the funds until their age 21 in the state they live in but that did not happen and cannot be undone now.  Disbursement happened in early 2019 prior to this getting into probate.  

Has anyone run across this scenario?  I need to file for these kids and I just got the tax info last week.

Thanks in advance for any input on this crazy case as the TCJA seems to also have some bearing here.

JSH

[jshoag27]

OK - I found this and I think I understand the message.

Source: https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/

KIDDIE-TAX REVERTS TO PRE-TAX CUTS AND JOBS ACT RULES!

Let’s do the time warp again!

Just two years ago, Congress passed the Tax Cuts and Jobs Act. And as part of that sweeping legislation, it changed the nature of the so-called Kiddie Tax, a tax on the unearned income of certain children. Prior to the Tax Cuts and Jobs Act, any income subject to the Kiddie Tax was taxable at the child’s parents’ marginal tax rate. By contrast, the Tax Cuts and Jobs Act made that income subject to trust tax rates.

For those children with more modest unearned income this often resulted in modest tax savings. But for those children with more significant unearned income, the compressed trust tax brackets typically led to a higher tax bill.

Now, just two years later, Congress has issued a mighty call to “Belay that order!”

In a complete and total reversal, the SECURE Act (Section 501), once again, makes any income subject to the Kiddie Tax taxable at the child’s parents’ marginal tax rate. The change is effective for 2020, with an additional kicker… taxpayers can elect to apply the old (or is it new?) rules to the current 2019 tax year, and back to 2018 as well! As such, advisors with clients who have children that had substantial unearned income in 2019 can simply choose to use the new rules (unless the ‘old’ rules at trust tax rates actually were more favorable in the case of extremely affluent parents), and for 2018 advisors should carefully evaluate the potential tax savings that may be achieved by filing an amended return and electing to apply the new/old rules back to that prior year.

So I planned on just filing the children on their own returns with their own standard deductions with Form 8615 in the most favorable tax method. Any other ideas on what to check or not to check on each 8615 appreciated and whether or not an 8615 worksheet is needed or if I should attempt the family link mentioned in another post would be great to hear about.

[rbynaker]

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@jshoag27 wrote:

Kids have no earned income.  Mom has no earned income. Grandparents are supporting all 3: mom and 2 kids and themselves.  Filed Grandparents return just on the 2 grandparents alone in 2019 as normal with no dependent grand kids this time.

Form 8615 gets massively complicated due to the kids age of 17 and 18 and as well as the parent (mom) had no reportable income.

Where did the kids' money go?

If you're correct that "Grandparents are supporting all 3" then shouldn't the grandparents claim the kids as dependents and get ODC?

@TAXOH is awesome at this stuff, I always have to fumble around in flowcharts so I'm probably missing something.  I thought the test was whether or not a QC provides more than half of their own support.

So then if the kids are dependents of someone else (grandparents), they cannot claim themselves and are stuck with the crappy standard deduction rules, right?

For kiddie tax, I don't remember how the old rules worked but I think grandparents are out of the picture.  So kids are taxed at Mom's rates and with Mom having no income, they're just taxed at regular rates (but since there are two of them they might share the same set of tax brackets).

Since I'm a one-person shop I have to review my own work.  So I set an expectation of what the final return will look like and then compare it to what the software comes up with.  My expectation would be each kid's gross income minus the limited standard deduction and taxed at the Single rates with the thresholds cut in half (so basically at the MFS rates.)  But I don't see a way around crunching all of the kiddie tax numbers (which likely includes creating a mock return for Mom if she didn't file one) and plugging everything into the various 8615 worksheets (AFAIK they haven't "fixed" the 8615 yet to go back to the old rules but I think there are worksheets you can use in the instructions.)

Rick

[TAXOH]

Like Rick mentioned, where did the kids money go?  Was it spent on anything?  If the grandparents provided over half of the support of the grandkids and they lived there more than half of the year the grandparents should be able to claim them as dependents.  They would just need to make sure the kids  return is filed stating they are being claimed as a dependent on someone else's return.  The grandparents should also be able to claim their daughter as a qualifiying relative since she had no income and lived there the entire year and they supported her.

[jshoag27]

The kids money is tied up in an attorney's account waiting on a decision by the probate judge. The 1099-Rs are issued as fully taxed disbursements but the mom, who is named trustee on the 1099s is not allowed to touch the money without providing spending plans to the probate judge through her attorney.  I am waiting for the attorney to send statements from his ledger about the money.  Some funds have been disbursed for a car and Christmas 2019.  The remainder is being help up by the probate judge expecting this attorney to provide a spending plan  from the mom for the kids best interest.  

[sjrcpa]

"the mom, who is named trustee"

Is there a trust here? Did Dad name a trust as beneficiary?

[jshoag27]

The deceased father named the minor kids 50-50 beneficiaries - the mom became default trustee just as in an UTMA account because she  was their mom. then the probate court stepped in to ensure the spending plan was proper by her.   The attorney has custody of the funds at the moment.  Please focus on the taxation questions presented.