{"id":1020,"date":"2018-08-29T14:44:00","date_gmt":"2018-08-29T18:44:00","guid":{"rendered":"https:\/\/fluentricciardi.com\/?p=1020"},"modified":"2022-01-27T14:47:23","modified_gmt":"2022-01-27T18:47:23","slug":"kiddie-tax-changes-what-you-need-to-know","status":"publish","type":"post","link":"https:\/\/fluentricciardi.com\/kiddie-tax-changes-what-you-need-to-know\/","title":{"rendered":"Kiddie Tax Changes: What You Need to Know"},"content":{"rendered":"

The\u00a0Tax Reform Act of 1986<\/a>\u00a0first brought about the concept of taxation on the investment and unearned income for those individuals over thirteen and under seventeen years of age.\u00a0 It is commonly known as the \u201cKiddie Tax.\u201d\u00a0 Originally the law only covered children over fourteen, as children under that age cannot legally work.\u00a0 This meant that any income of a child under fourteen was derived from dividends or interest from bonds.\u00a0 More recently, the age limits were revised to include children who hadn\u2019t reached age nineteen by the close of the tax year, and full-time students under age twenty-four whose earned income was less than half of their own support, had at least one living parent, and didn\u2019t file a joint return.\u00a0 In the original tax bill, this tax is imposed on children whose investment and\u00a0unearned income<\/a>\u00a0was higher than the annual threshold.\u00a0 Under the old law, the first $1,050 of a child\u2019s income is tax-free and the next $1,050 is taxed at 10%.\u00a0 Furthermore, any unearned income over the $2,100 was taxed at the parents\u2019 rate if it was higher than that of the child.\u00a0 Earned income, like wages from a job, were still taxed at the child\u2019s lesser rate.\u00a0 In other words, the earned income from a job and the unearned investment income up to $2,100, less the standard deduction, was taxed at the child\u2019s rate.\u00a0 This encouraged parents and grandparents to make financial gifts to minors in the form of appreciated stock, assets from taxable estates, income transfers, and inherited IRAs.<\/p>\n

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During the introduction of the new\u00a0Tax Cuts and Jobs Act of 2017<\/a>\u00a0little was said about the rewrite of the Kiddie Tax rules. With these changes taxpayers will need to give pause in their strategies.\u00a0 Beginning in 2018 and continuing until at least through 2025, when the law sunsets, the taxable income attributable to the child\u2019s earned income is taxed under the rates for a single individual, as before.\u00a0 However, the portion of the unearned income that is subject to tax, meaning the amount over $2,100, will now be taxed at the brackets applicable to trusts and estates.\u00a0 This does mean that calculating the Kiddie tax will become far simpler.\u00a0 Previously, parents and children would have to combine the income from all of the children, figure the parents\u2019 tax rates and spread the tax between everyone.\u00a0 Now everyone\u2019s earnings are separate.\u00a0 But with the use of the trust and estate brackets, there will be added complication in the form of a higher tax bracket for most.\u00a0 For example, the income from IRA distributions, interest and short-term gains is taxed at the rate of 37% when the estate and trust rates are applied (once it exceeds $12.500).\u00a0 By contrast, the married parents would only pay that rate on the portion of their income that exceeded $600,000.\u00a0 The top long-term capital gains rate of 20% kicks in at $12,700 for the child, but not until $479,000 for the parents.<\/p>\n

Children of high earning parents may find themselves in a lower tax bracket, as high-income taxpayers could be taxed up to 39.6%.\u00a0 However, families of modest means will be hit harder, where the tax bracket is well under 37%.\u00a0 Additionally, the tax applies to all types of unearned income, including Social Security from survivor\u2019s benefits, legal settlements, investment income, and inherited IRAs and 401Ks.<\/p>\n

The new tax law changes will also affect the standard course of utilizing inherited IRAs and other investments for school funding.\u00a0 For example, a college student has parents in a fairly low-income tax bracket.\u00a0 The grandparents previously gifted the child stock to sell.\u00a0 For this example, the child pulls out funds for college, resulting in $200,000 of capital gains.\u00a0 Under last year\u2019s taxes, the $200,000 would have been subject to his parents\u2019 capital gains rate of 15%.\u00a0 Under the new law, the same gains are subject to 20%.\u00a0 Under this taxation difference, it would have been a better strategy to gift the stock to the parents and have them sell it for the lower bracket on the gains.\u00a0 Additionally, because by definition, a child must provide over half of their support from earned income to qualify as financially independent, this withdrawal of funds will not remove them from the Kiddie Tax effects.\u00a0 Many financial advisory firms are recommending that the safest tax strategy is to have the student borrow for college and then utilize the IRA withdrawals to pay back the loan(s) after they have turned 24.<\/p>\n

Parents and grandparents wishing to gift investment wealth to their descendants will have to utilize a bit more strategy.\u00a0 Leaving a child a Roth IRA may present a better option, as these result in tax-free payouts that would not be subject to the Kiddie Tax.\u00a0 Naming children or grandchildren as beneficiaries on a Roth IRA and rolling the investment funds from a traditional pre-tax IRA to the Roth can be a good strategy.\u00a0 Traditionally, the grandparents will have a lower income tax bracket and can take the hit of the taxes on the pre-tax rollover.\u00a0 Make sure that you do not leave your IRAs subject to your estate.\u00a0 This will mean that the distribution to your beneficiaries will need to take place within five years and cannot be stretched over the life span of the beneficiary.\u00a0 Choosing investments wisely, is also a good strategy.\u00a0 With $2,100 of non-taxable and low tax rate dollars to work with, dividends from large investments can be relatively sheltered from tax.\u00a0 On the other hand, a taxable merger with large capital gains could result in a much higher Kiddie Tax.\u00a0 If the goal is to pay for education, funding a 529 college plan is a good way to give tax free assistance.\u00a0 Furthermore, the Tax Cut and Jobs Act allows for up to $100,000 a year of 529 money per child to be used for kindergarten through twelfth grade private-school costs tax-free, provided your state allows it.\u00a0 Gifts of low-basis stocks to a\u00a0Uniform Transfers to Minors Act<\/a>\u00a0account is also still a sound strategy.\u00a0 Since the parents\u2019 return is no longer involved, UTMA simpler now.\u00a0 Additionally, once UTMA held stocks are sold, the funds can be transferred into a 529 account.<\/p>\n

Many people wait until year-end to make substantial gifts.\u00a0 With the complications added by the Tax Cuts and Jobs Act, now is a good time to start the process of determining the best possible ways in which to pass along your wealth. The best advice is to seek the aid of a tax professional to run numbers and find the best way to achieve your goals.<\/p>\n","protected":false},"excerpt":{"rendered":"

The\u00a0Tax Reform Act of 1986\u00a0first brought about the concept of taxation on the investment and unearned income for those individuals over thirteen and under seventeen years of age.\u00a0 It is commonly known as the \u201cKiddie Tax.\u201d\u00a0 Originally the law only covered children over fourteen, as children under that age cannot legally work.\u00a0 This meant that […]<\/p>\n","protected":false},"author":6,"featured_media":1021,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"yoast_head":"\nKiddie Tax Changes: What You Need to Know - Fluent & Ricciardi<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fluentricciardi.com\/kiddie-tax-changes-what-you-need-to-know\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Kiddie Tax Changes: What You Need to Know - 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