A Q&A on your Child’s Tax Liability
Once upon a time, high-income families could reduce their tax burden by shifting income to their children. Many took advantage of this loophole by putting investments in their child’s name to take advantage of their lower tax rate.
The kiddie tax was introduced in the mid-1980s to limit this practice and taxed the passive income of children under age 17 based on the parents’ marginal tax rate with some additional considerations. The Tax Cuts and Jobs Act of 2017 (TCJA), intended to simplify the tax code, changed the tax on a child’s unearned income. As a result, your child’s tax liability may increase significantly.
Here are the answers to some questions you may have:
Q: What is the kiddie tax?
A: The kiddie tax is a tax on unearned income, such as interest income, capital gains or dividends. It does not apply to wages earned from employment, such as for summer jobs or internships. It was created to deter parents from trying to avoid paying higher taxes by shifting sources of unearned income to their children.
Q: Who is subject to the kiddie tax?
A: Dependent children under 19 years old (or under 24 and a full-time student) with unearned income greater than $2,200 for 2019.
Q: How has the kiddie tax changed?
A: Under the TCJA, dependent children are now taxed using the trust and estates schedule, as follows:
Q: How might this change affect you and your kiddie?
A: Tax rates for trust and estates “climb the brackets” faster, which means your child may be subject to a higher tax rate than before. For example, a married couple doesn’t reach the highest tax bracket of 37% until their joint income is $612,350 but taxable income hits the top rate of 37% for trust and estates at $12,751.
If your child’s income is subject to the kiddie tax, speak to your tax advisor about the necessary documentation to complete. And meet with your Luma Wealth advisor for guidance on creating a wealth plan that makes the most of your income and your child’s.
Source: 2019 Instructions for Form 8615, Tax for Certain Children Who Have Unearned Income, Department of the Treasury, Internal Revenue Service, September 27, 2019, https://www.irs.gov/pub/irs-pdf/i8615.pdf