{"id":20646,"date":"2020-08-14T08:00:00","date_gmt":"2020-08-14T13:00:00","guid":{"rendered":"https:\/\/taxprocenter.proconnect.intuit.com\/?p=20646"},"modified":"2021-06-10T16:54:00","modified_gmt":"2021-06-10T21:54:00","slug":"kiddie-tax-resets-for-2020","status":"publish","type":"post","link":"https:\/\/accountants.intuit.com\/taxprocenter\/tax-law-and-news\/kiddie-tax-resets-for-2020\/","title":{"rendered":"Kiddie tax 2020: Rules and Rates for Unearned Income"},"content":{"rendered":"

The so-called \u201ckiddie tax\u201d is designed to prevent parents or other relatives from shifting investment income to a child in a lower tax bracket. Since its enactment as part of the Tax Reform Act of 1986, the kiddie tax rules traditionally tied the tax on a child\u2019s unearned income to the tax rates of the child\u2019s parents. However, a law change made by the 2017 Tax Cuts and Jobs Act<\/a> uncoupled the kiddie tax from the parents\u2019 rates. Instead, effective for tax years beginning after 2017 and before 2026, the law change provides that the tax on a child\u2019s unearned income was to be figured using the tax brackets for estates and trusts (with some modifications).<\/p>\n

Since the tax rates for estates and trusts increase more steeply than the individual income tax rates, this change could result in an increase on the kiddie tax for some families.<\/p>\n

Kiddie tax reset overview<\/b><\/p>\n

Effective for tax years beginning after 2019, the Setting Every Community Up for Retirement Enhancement Act<\/a> repeals the law change made by the Tax Cuts and Jobs Act.<\/p>\n

As under prior law, the kiddie tax applies to a child\u2019s net unearned income if the child is under age 19 or is a full-time student under age 24, has at least one living parent, has unearned income above a threshold amount ($2,200 for 2020), and doesn\u2019t file a joint return with a spouse for the year. In the case of a child over age 17, the kiddie tax applies only if the child\u2019s earned income does not exceed one-half of their support.<\/p>\n

Under the kiddie tax, a child is taxed at normal tax rates on earned income plus unearned income up to the threshold amount. Thus, for 2020, the normal tax rates apply to a child\u2019s earned income plus $2,200 of unearned income. A child\u2019s net unearned income (above the amount taxed at the child\u2019s rate) is taxed to the child at his or her parents\u2019 tax rate (assuming that rate is higher than the child\u2019s rate).<\/p>\n

Specifically, the child\u2019s tax on net unearned income is the amount of the child\u2019s share of the \u201callocable parental tax.\u201d For this purpose, the allocable parental tax is the excess of the tax that would be imposed on the parents\u2019 taxable income if that income included the net unearned income of all the parents\u2019 children subject to the kiddie tax, over the tax that would be imposed on the parents\u2019 taxable income without regard to the kiddie tax. The child\u2019s share is the amount of tax that bears the same ratio to the total allocable parental tax as the child\u2019s net unearned income bears to the total unearned income of all of the parents\u2019 children subject to the kiddie tax.<\/p>\n

Under rules that were untouched by the Tax Cuts and Jobs Act, a parent can sidestep the kiddie tax by reporting a child\u2019s income directly on the parent\u2019s return. This election can be made if:<\/p>\n