How Changes to the Kiddie Tax May Affect You
Not all children make a significant amount of money from an outside job, however, some kids are lucky enough to receive a fair amount of spending money from their family. If your minor child receives an allowance or monetary gifts from their grandparents, you may need to know about the Kiddie Tax.
Under the Tax Cuts and Jobs Act of 2017 (TCJA) that Congress enacted, there are new rules, called the Kiddie Tax rules, that keep grandparents and parents from shifting their income to children. It was first enacted in 1986 to keep parents from hiding their income by putting their investment accounts in their children’s names who are typically in much lower tax brackets. To begin with, the Kiddie Tax applied until the child turned 14 years of age, but in 2008, the threshold increased to include kids through age 18 and students enrolled full-time through the age of 23.
The Age Factor
Under these new rules, the Kiddie Tax could apply to children up to the age of 24 if all four of these requirements are met throughout the tax year:
- The child doesn’t file a joint tax return for the year.
- At least one of the child’s parents are living at the end of the year.
- The child’s unearned net income in the year is more than the income filing threshold for the year and the child has positive taxable income. The unearned net income threshold for kids is $2,100 for 2018. If the unearned net income doesn’t exceed the threshold, the Kiddie Tax doesn’t apply. If the threshold is exceeded, only the unearned income above the threshold is considered in the calculation.
- The child is 17 or younger at the end of the year; the child is 18 before the end of the year and their earned income doesn’t exceed half of their support; or the child is age 19 to 23 at the end of the year and is a student and their earned income doesn’t exceed half of their support. A child is considered a student if they attend school full-time for a minimum of five months during the year.
The Kiddie Tax Rules are Changing
For the upcoming years of 2018 through 2025, the Kiddie Tax rules have changed to a portion of the net unearned income at the rates paid by estates and trusts. These rates may be up to 37 percent for regular income, or up to 20 percent for long-term qualified dividends and capital gains.
In previous years, any investment income higher than $2,100 was taxes at the grandparents’ or parents’ tax rate. Recent changes to the tax rate structure means that the investment income will now be taxed at the 2018 estate and trust tax rates.
- Up to $2,550 = 10 percent
- $2,551-$9,150 = 24 percent
- $9,151-$12,500 = 35 percent
- Over $12,500 = 37 percent
Do You Still Have Questions?
How much a family may be required to pay under the new requirements depends on the child’s tax bracket and the amount of the investment income. The parent’s taxable income will no longer affect the child. There are also a number of educational savings plans available to assist your child. It is never too late to make plans for your child’s future. David Toback, Attorney at Law, has years of experience dedicated to helping people plan for their future. Contact him in Tampa today to schedule a consultation.
Resources:
law.cornell.edu/uscode/text/26/1
irs.gov/taxtopics/tc553
