Kiddie Tax

Kiddie Tax

Normally, tax law principles are quite simple: the person who earns the money, pays tax at their current single or married filing joint rates. Under the old law, however, there was a strange provision that provided that children under age 19 or (or under 24 if they were unmarried and full time students) were taxed on unearned income in excess of certain amounts at their parent’s rate if it were higher than their own rate. This was put in place because there was a perception in Congress that the very rich were placing assets in their kids names and having the earnings from these assets taxed at the much lower rate of the children. 

Tax reform changed this. Starting with 2018 returns, the first $1050 of net unearned income of the child is tax free, with the next $1,050 taxed at the rate that a trust would pay, which is the highest rates in the Internal Revenue Code. Earned income, however, still is taxed to the child at the individual tax rates for single filers.

What this all means to you: For many, the kiddie tax will be higher because the income tax bracket for trusts are more compressed when compared to the tax brackets for individuals. For 2018, as an example, the 37% top rate on ordinary income begins at only $12,501 for trusts, and the 20% capital gains rate kicks in at trust incomes in excess of $12,700.

NOTE: You still can transfer property to kids to tax them on the unearned income but the limit will be about $2,100 per kid, per year of income. Also, hiring kids still is very viable since the kiddie tax does NOT apply to wages.

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