Posted by Larry Hurt

New Kiddie Tax Rules: Whats it all About

New Kiddie Tax Rules: Whats it all About

On Dec. 20, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act, or the Secure Act. The new law is mainly intended to expand opportunities for individuals to increase their retirement savings. But it also includes some other important tax changes that have nothing to do with retirement. One of the big ones is an easing of the dreaded Kiddie Tax rules that can penalize investment income collected by children and young adults. Here’s what you need to know about this favorable Kiddie Tax development.

The adverse effect of Kiddie Tax Rules

Prior to Tax Cults and Jobs Act (TCJA), the children are entitled to pay for the Kiddie Tax, however, if their parents have higher income tax compared to them then it shall be collected from the parents.

The age limit for the child for the Kiddie Tax rules to take effect is 24 years of age; this will be discussed in the latter part. 

The effect of the change to Kiddie Tax would be expensive for a child or young adult with considerable unearned income. The portion of unearned income, which typically from investments, of the affected child or young adult shall be charged at the rates paid by trusts and estates, this is one of the changes of TCJA for the year 2018 until 2025. This is considered as expensive due to the fact that trust and estate rates rapidly ascend to 37 % for regular income and short-termed capital, moreover, 20 % is also charged for lengthy capital benefits and dividends. The taxable income for the rate schedule on trusts and estates in the year 2019 with a 37 % maximum rate reached $12,951 compared to 2018 with a 37 % maximum rate also, reached only $121,751.

The new regulation was reviewed later on by Congress, worried that TCJA modification unjustly increased those who are survivors of deceased military personnel, first aid responders and emergency medical workers. Thus, the reinstatement of the pre-TCJA Kiddie Tax Calculation and the Secure Act retroactively revoked the TCJA Kiddie Tax rate change for all children and young adults so that it would be based on the marginal tax rate of the parent(s).

Furthermore, application of tax-saving change to 2018 and /or 2019 returns of Kiddie Tax victims could be an option while the Secure Act's advantageous change to the Kiddie Tax rates is generally effective for 2020 and beyond. Consequently, if there is a Kiddie tax victim in the family, a modified 2018 return may be in effect. The victim’s 2019 return as well should be filed this year. 

Supposedly, the taxpayer wants to obey the favorable Secure Act change for 2018 – 2019, here is a quick review on the updated Kiddie tax rules for 2018 and beyond.

Kiddie Tax basics

Net unearned income of the child or young adult can be charged at the federal income tax rates paid by the child's parent(s) according to their Kiddie Tax rules, which would be disadvantageous for the parents because most of them belong to a higher tax bracket. Thus, the effect on the child with considerable unearned income is significant, however, this significance is much lesser compared to before implementation of the Secure Act. 

For a dependent child or young adult liable to Kiddie Tax, calculation of the taxable income tax would allow him/her to subtract his or her deduction amount. 

*Year 2018, if the child is unmarried, the standard deduction would either be (1) $1050 or (2) earned income + $ 350, not to exceed $ 12,000 whichever is greater.

*Year 2019 applies the same condition with standard deduction would either be (1) $1100 or (2) earned income + $ 350, not to exceed $ 12,200 whichever is greater.

*Year 2020 applies the same condition with standard deduction would either be (1) $1100 or (2) earned income + $ 350, not to exceed $ 12,400 whichever is greater.

The key factor for measuring potential exposure to Kiddie Tax is the age

As mentioned, the age limit for the child or young adult is 24 years old. However, if the child or young adult is 19 to 23 years old at the end of the year, he/she must be a student to qualify for the Kiddie Tax. Furthermore, the child who is more applicable to Kiddie Tax is children ages 18 and below.

To learn more about Kiddie Tax rules, its always best to consult with a tax professional.

Larry Hurt
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