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What to know about changes to the “Kiddie tax”

Posted on November 20, 2018

The Tax Cuts and Jobs Act enacted in late 2017 is still shaking things up as tax payers become aware of how the new tax code will affect their individual circumstances this year.

The so-called “Kiddie Tax,” the tax imposed on certain children with unearned income, is one area where many families may feel changes to their bottom lines. The code has always been a little hard to follow because of its many exceptions.

One way the old law was complicated was if the child’s parents were divorced or married filing separately, as the tax preparer had to determine which parent’s marginal tax rate should be used. Another complexity stemmed from computing the child’s allocable share of the parental tax when the child had siblings who were also subject to the kiddie tax.

Thanks to the new law, most of these complexities vanish for 2018 through 2025. Here’s what to know:

  • The determination of who is subject to the kiddie tax remains the same, so children who would have been subject to the old kiddie tax are subject to the new kiddie tax.
  • A child’s taxable income is still calculated as gross income less allowable deductions.
  • Even though children subject to the kiddie tax are permitted to itemize their deductions, most claim the standard deduction, according to IRS data.
  • A dependent child may claim the single standard deduction, but the deduction for 2018 is limited to the greater of $1,050 or the sum of the child’s earned income plus $350. Therefore, a dependent child’s standard deduction could be as small as $1,050 or as large as $12,000, the amount of the basic standard deduction for single taxpayers in 2018.
  • “Net unearned income” is a key element in determining the new kiddie tax. NUI is the excess of a child’s unearned income over the sum of (1) $1,050, plus (2) the greater of $1,050 or the child’s itemized deductions related to the unearned income. By law, NUI cannot exceed the child’s taxable income.
  • For 2018, a child’s income that can be taxed at rates below 24% is limited to the sum of ETI plus $2,550, the minimum taxable income for the 24% estate/trust tax bracket. Further, income that can be taxed at rates below 35% is limited to the sum of ETI plus $9,150, the minimum taxable income for the 35% estate/trust tax bracket. Income that can be taxed at rates below 37% is limited to the sum of ETI plus $12,500, the minimum taxable income for the 37% estate/trust tax bracket. Any remaining income that does not fit within the foregoing limits will be taxed at a rate of 37%.

Obviously, despite Congress’s intent to simplify the kiddie tax, the new law is still very complicated.

Teipen Selanders Poynter & Ayres recommends that parents with children who are affected by the kiddie tax set aside time to sit down with a CPA to work out these taxes to make sure the new rules are followed correctly – and individuals get the full benefit of the new rules.