{"id":14304,"date":"2019-01-29T08:00:10","date_gmt":"2019-01-29T14:00:10","guid":{"rendered":"https:\/\/taxprocenter.proconnect.intuit.com\/?p=14304"},"modified":"2020-07-23T16:15:57","modified_gmt":"2020-07-23T21:15:57","slug":"impact-of-tax-reform-on-the-kiddie-tax","status":"publish","type":"post","link":"https:\/\/accountants.intuit.com\/taxprocenter\/tax-law-and-news\/impact-of-tax-reform-on-the-kiddie-tax\/","title":{"rendered":"Impact of Tax Reform on the Kiddie Tax"},"content":{"rendered":"

The Tax Cut and Jobs Act<\/a> (TCJA), passed by Congress in 2017, introduced numerous changes to the tax code. While some changes may negatively affect a tax practitioner\u2019s clients, other changes will have a more positive outcome.<\/p>\n

One positive change is the Kiddie Tax, which potentially affects a taxpayer with one or more dependent children who received unearned income during tax year 2018. Overall, the changes to the Kiddie Tax rules are relatively small, and the TCJA streamlined the rules a bit; however, it is still important to look at the overall impact these changes can create on a taxpayer\u2019s final tax bill.<\/p>\n

The biggest change is found in IRC Secs. 1(j)(4)(B) and (C). In these sections, the child\u2019s maximum taxable income shall not be taxed at a rate lower than the 24 percent, 35 percent or the 37 percent rate that is more than the sum of the child\u2019s earned taxable income, plus the minimum taxable income for the applicable tax brackets listed in IRC Sec.1(j)(2)(E).<\/p>\n

Earned taxable income (ETI) is defined in Sec. 1(j)(4)(D) as a child\u2019s taxable income reduced by net unearned income. ETI adjusts the upper limit for each bracket of the rate table for estates and trusts to determine the amount of tax owed. Note that ETI is a new term, calculated separately from a child\u2019s earned income.<\/p>\n

Paragraph (2)(E) of Sec. 1(j) modifies the rates for estates and trusts, and replaces the parent\u2019s marginal tax rate applied to the net unearned income of a dependent child beginning in tax years after Dec. 31, 2017, and ending before Jan. 1, 2026.<\/p>\n\n\n\n\n\n\n\n\n
Ordinary Income Tax Rates for\u00a0Trusts and Estates\u00a0for Tax Years 2018 to 2025<\/span><\/th>\n<\/tr>\n<\/thead>\n
$0 – $2,550<\/td>\n10% bracket<\/td>\n<\/tr>\n
$2,551 – $9,150<\/td>\n24% bracket<\/td>\n<\/tr>\n
$9,151 – $12,500<\/td>\n35% bracket<\/td>\n<\/tr>\n
$12,501 and more<\/td>\n37% bracket<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Any long-term capital gains and\/or qualified dividends a taxpayer\u2019s child receives uses the capital gains rate for estates and trusts.<\/p>\n\n\n\n\n\n\n\n
Long-Term Capital Gains and Qualified Dividend Tax Rates\u00a0for Trusts and Estates for Tax Years 2018 to 2025<\/span><\/th>\n<\/tr>\n<\/thead>\n
$0 – $2,600<\/td>\n0% bracket<\/td>\n<\/tr>\n
$2,601 – $12,700<\/td>\n15% bracket<\/td>\n<\/tr>\n
$12,701 and more<\/td>\n20% bracket<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Keep in mind two things regarding these new tax rates:<\/p>\n

    \n
  • The highest rate for ordinary income is 37 percent and 20 percent for capital gains. Under the prior IRC, ordinary income could be taxed at a rate as high as 39.6 percent, or 20 percent for capital gains and qualified dividends.<\/li>\n
  • Comparing the trust and estate rates to the parent\u2019s schedules shows more compressed income rate brackets than the individual tax tables.<\/li>\n<\/ul>\n

    Preparers should make their clients aware of this change to avoid surprises, as well as take any possible steps to avoid an unfavorable tax rate.The TCJA changed the tax rates of the Kiddie Tax, but the remaining rules remain. This includes how net unearned income is calculated, along with the age and support tests prescribed under IRC Sec. 1(g)(2)(A). A taxpayer\u2019s child is still subject to the Kiddie Tax until the age of 24 if all of the following apply:<\/p>\n

      \n
    • The child didn\u2019t file a joint return.<\/li>\n
    • One or both parents are alive at year end.<\/li>\n
    • The child\u2019s net unearned income is greater than the unearned income threshold ($2,100 for 2018) and has positive income after any applicable deductions, including the dependent\u2019s standard deduction.<\/li>\n
    • The child meets one of the age-related conditions for being a dependent.<\/li>\n<\/ul>\n

      To illustrate the impact of the TCJA, consider the following situation:<\/p>\n

      Mark is a client who files a joint return. He has two children, Karen, age 13, and Jack, age 19. Jack is a full-time university student. Both Karen and Jack are dependents on Mark\u2019s tax return. Jack earns $2,300 in wages at a part-time job and received $8,000 in interest from bonds gifted by his grandfather. Jack also sold some stock gifted to him when he was age 10 for a capital gain of $1,200. Karen had no income.<\/i><\/p>\n

      Jack\u2019s gross income is $11,500, with $2,300 earned income and $9,200 unearned income. His standard deduction is $2,650 ($2,300 earned income + $350), giving Jack a taxable income of $8,850.\u00a0<\/i><\/p>\n

      Jack\u2019s unearned income of $9,200 is reduced by the $2,100 unearned income threshold for a net unearned income of $7,100.\u00a0<\/i>Earned taxable income for Jack is the difference between his taxable income and net unearned income. In this case, Jack\u2019s ETI is $1,750. ETI is added to each bracket of the estates and trusts rate tables.\u00a0<\/i><\/p>\n

      The $1,200 of capital gains is taxed at the 15 percent bracket on the long-term capital gains table for Estates & Trusts (Jack\u2019s taxable income of $8,850 pushes him into the 15 percent tax bracket). The remaining taxable income will be taxed from the ordinary income tax rates for Estates & Trusts. <\/em><\/p>\n

      Jack\u2019s remaining taxable income after the capital gains is $7,650. The first $4,300 ($2,550 + ETI of $1,750) is taxed 10 percent, and the remaining $3,350 will be taxed at 24 percent.<\/em><\/p>\n

      As a result, Mark owes $1,414 ($180 for the $1,200 of long-term capital gains plus $430 at the 10-percent rate and $384 at 24 percent) in total tax on Jack\u2019s behalf.<\/em><\/p>\n

      In prior tax years, if Mark had had a marginal tax rate of 35 percent, Jack\u2019s tax on his net unearned income would have been $2,779.<\/em><\/p>\n

      As seen from the example above, the amounts owed can be significantly different from 2017. While this is a favorable change, a tax practitioner should pay particular attention to any clients whose children have appreciable assets that have recently grown in value. It may be helpful to discuss selling down the assets sooner, rather than later, to manage any gains and help reduce the Kiddie Tax. Regardless of the situation, it will be critical for a tax practitioner to reach out to any clients with dependent children and ensure they are properly prepared for all changes the TCJA will bring in the coming tax season.<\/p>\n

       <\/p>\n

      Editor’s note<\/strong>: This article has been updated with clarifying edits to the example.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Find out how the changes to the Kiddie Tax potentially affect a taxpayer with one or more dependent children who received unearned income during tax year 2018.<\/p>\n","protected":false},"author":144648909,"featured_media":10985,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rkv_browse_by_id":0,"rkv_cta_id":0,"rkv_optimize_for_pagespeed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"useModifiedDate":false,"customPublishDate":"","_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[509474089],"tags":[582953261],"intuit_collection":[],"intuit_series":[],"coauthors":[646041702],"class_list":["post-14304","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-law-and-news","tag-tax-reform"],"header_image":"","yoast_head":"\nImpact 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