Jul 312018
 

The new kiddie tax will have new winners and losers so beware parents and grandparents. It will also raise the cost of giving sharply in some situations. The tax is a special levy on a child’s “unearned” income above $2100. It typically falls on investment income such as dividends, interest and capital gains, and it doesn’t apply to a youngster’s earned income from mowing lawns or designing websites. You may want to check on the specific activity to make sure it is included in the tax.

Congress passed the kiddie tax in 1986 to prevent wealthy or affluent taxpayers form taking advantage of their children’s lower tax rates by shifting income producing assets to them. Originally the provision was for children under age 14, but lawmakers expanded the kiddie tax over time. Today, the tax applies to nearly all children under age 18 and many who are under 24, if they are full time students and aren’t self supporting.  For 2015, about 343,000 children paid a total of $1 billion in kiddie tax, according to the latest Internal Revenue Service data.

Last year’s overhaul made an important change to the rates for this tax. Beginning this year and continuing through 2025, when the law sunsets, a child’s unearned taxable income will be subject to trust tax rates. Under the prior law, this income was usually taxes at the parents rate. The kiddie tax will change that.

This means the kiddie tax will be far simpler. The prior version often required families to combine the unearned income of siblings, figure tax at the parents rate,and spread the tax among the children. Now siblings earnings are separate, and there’s no need for awkward conversations in which parents must reveal their own income to children so the children can file returns. The effect is that the new kiddie tax may be lower for children of high income parents, but higher for parents of lower income brackets.msnbc

 


  •  07/31

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