Kiddie Tax – What You Need to Know Now
In days gone by, some parents and grandparents would attempt to put investments in the names of their young children or grandchildren in lower tax brackets in an attempt to save on taxes. But Congress wasn’t fooled for long and created the “kiddie” tax back in 1986 to discourage such practices. Gradually over the years this tax has become more far-reaching and, today, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become fiercer than ever.
Before TCJA
Years ago, the kiddie tax applied only to children under age 14 — which still left families with ample opportunity to enjoy significant tax savings by income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.
Kiddie tax has grown fierce
Although the TCJA doesn’t further expand who’s subject to the kiddie tax, it will effectively increase the kiddie tax rate in many cases.
For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37 percent once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000.
Similarly, the 15 percent long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20 percent rate kicks in at $479,001 and $12,701, respectively.
In many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability.
It’s important to know the facts
To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who are no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them.
TCJA is complex and far reaching and individuals and companies need to examine the big picture this year more than ever to achieve the lowest tax liability. We’re here to help. Please contact Shlomo Benzaquen, CPA, MBA, Ciuni & Panichi, Inc. Tax Department Senior Accountant at 216-831-7171 or by email here.
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Tax and Restricted Stock Awards
Tax Consequences of Home Sales
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