Kiddie Tax Rules Change Back for 2020

Mar 16, 2020

Good news! If you have kids under the age of 19 or full-time students under the age of 24, they might owe less in taxes because of a recent change to the "Kiddie Tax" rules.

About the Kiddie Tax

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), children under the age of 19 or full-time students under the age of 24 with unearned income in excess of $2,100 would be taxed as an extension of their parent's return, at the parent's tax rate. This means:

  • The first $1,050 of unearned revenue would be tax free
  • The second $1,050 would be taxed at the child’s rate (usually 10%)
  • The remaining would be taxed at the parent’s rate (child’s rate would apply if higher than parents)

The Kiddie Tax rates did not apply if the child was married and filed a joint return or the child did not have a living parent at year-end.

After TCJA (tax years 2018 and 2019), the child’s tax rate would be based on the Trust and Estate Rates, which can be significantly higher than parent’s rates (up to 37%). This means:

  • The calculation would be the same for the first $2,100
  • The remainder would be taxed at the Trust and Estate Rates
  • Amounts over $12,750 would be subject to 37% tax bracket

>>> Starting in 2020, these rules will revert to the “Old” Kiddie Tax rules and children will be an extension of the parent’s tax rate.

Congress has also granted taxpayers the option to apply the old rules to 2018 and 2019. As you can see in the scenarios below, in some situations it might be beneficial for the child to amend their 2018 return and use the old rules for tax year 2019.

SCENARIO 1 – 2017

Imagine it's 2017, and a child had $15,000 of unearned income. If the parents had a tax rate of 15%, the child's income tax would be roughly $2,040.

   $0  (first $1,050)

+ $105  (10% * next $1,050)

+ $1,935  (15% * Remaining $12,900)

= $2,040 tax liability

SCENARIO 2 – 2018 or 2019

Now it's 2018 or 2019, and the same child has $15,000 of unearned income. The child's income tax would significantly increase due to the tax bracket on the remaining $12,900 being based off the Trust and Estate Rates. An estimate of this tax liability would be close to $3,200 (a $1,160 increase).

If you have questions about the Kiddie Tax or would like to discuss using the old rules for 2019 or amending a 2018 return, please contact our office.

Contributing Author:

 

James Marsicek, CPA  |  Email  |  LinkedIn

James Marsicek joined the SGA team in July 2019 and primarily focuses on tax preparation and planning. He has more than seven years of accounting experience and enjoys working with agriculture and construction clients. James graduated from Doane University in Crete, Nebraska, with bachelor's degrees in accounting and business administration. Professionally, he is a member of the American Institute of CPAs and the Kansas Society of CPAs. He is also a member of Pheasants Forever and the Optimist Club and enjoys outdoor activities like hunting, fishing, and golfing. James played baseball in college and volunteers as a youth baseball coach. In his free time, he loves attending sporting events.