Expertise Beyond the Numbers

Kiddie Tax Rules Modified Under the Tax Cuts and Jobs Act

Kiddie tax is an area that has been revamped under the recently enacted Tax Cuts and Jobs Act (TCJA). Modifications will impact individuals and families, although these updates have not received as much attention as many of the other TCJA changes.

Kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages and salary – i.e investment income.

Under previous law, a child’s unearned income above a certain threshold (currently $2,100 but adjusted each year for inflation) is taxed at the parent’s top marginal tax rates, if the parents’ tax rates are higher than the child’s. A child’s earned income is taxed at their own individual tax rate.

Under the TCJA, kiddie tax rules were simplified.

Beginning in the 2018 tax year, the net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.

Trusts and estates reach the highest tax bracket of 37% after only $12,500 of income, significantly faster than an individual. High-income individuals who were already in the maximum tax bracket will not see a significant difference under the new rules, however lower and middle income individuals subject to the new kiddie tax laws might see more of an impact.

A child’s earned income will still be taxed at their own individual brackets and rates under the TCJA.

Do you have questions on the new kiddie tax rules, or need assistance assessing what the TCJA means for you and your family? Please contact us if you have any questions as you navigate 2018 tax planning.