Changes to the kiddie tax. The Tax Cuts and Jobs Act passed by Congress and signed by President Trump, made some changes to the kiddie tax. The Tax Cuts and Jobs Act also simplified the kiddie tax, removing some of the difficulties of calculating the tax. In some cases the kiddie tax will go up for certain taxpayers, not down. Changes to the kiddie tax must be accounted for, unless you want mistakes on your tax return.
When young people, up to age 23 if a student, generally to age 18 if not in college, have earned income that exceeds certain limits, the kiddie tax comes into play on successful investments. Previous law required the kiddie tax to be the greater of two calculations. The first calculation was the tax on the child’s taxable income as if the kiddie tax did not exist. The second calculation was the sum of the tax on the child’s unearned income assessed at the parent’s marginal tax rate plus the tax computed on the remaining taxable income at the chile’s tax rates. This presented some challenges when the child’s parents were divorced or filing separate returns, because we had to determine which parent’s marginal tax should be used. Another complexity resulted when the child had siblings who wee also subject to the kiddie tax.
The Tax Cuts and Jobs Act did not include the ability to report the child’s unearned income on their parents tax return. Under previous law, the parent could us Form 8814, Parents Election to Report Child’s Interest and Dividends, to report the unearned income of their children who only had internet and dividend income. However, with the change in the tax rate for the kiddie tax, this is no longer an option under the new tax law.
The law introduces the concept of “earned taxable income”, which only applies to the computation of the kiddie tax.