The Tax Cuts and Jobs Act (TCJA) overhauls the Kiddie Tax rules to tax a portion of a qualified child or young adult’s unearned income at the same tax rates paid by trusts and estates, which can be as high as 37%.
Prior to the TCJA, the Kiddie Tax rate was equal to the parent’s marginal rate. TCJA only changes the Kiddie Tax rate structure, the rest of the Kiddie Tax rules are the same as previous years.
The Kiddie Tax is easier to calculate than before, but it can be more expensive for a child or young adult with significant unearned income. The child can subtract his or her standard deduction amount. The allowable standard deduction for 2018 is the greater of: (1) $1,050 or (2) earned income + $350, not to exceed $12,000. For children who are age 19-23 at year-end, the Kiddie Tax can only apply if he or she is a student.
These requirements must be filled for the Kiddie Tax to apply:
Requirement 1: The child does not file a joint return
Requirement 2: One or both of the child’s parents are alive at year-end
Requirement 3: The child’s net unearned income exceeds the threshold for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. The unearned income threshold for 2018 is $2,100. If the unearned income threshold is not exceeded, the Kiddie Tax does not apply. If the threshold is exceeded, only unearned income in excess of the threshold is taxable under the Kiddie Tax.
Requirement 4: The child (or young adult) falls under one of three age-related rules due to his or her age at year-end and the other factors mentioned below:
- 17 or younger at year-end: Kiddie Tax applies if the other three requirements are also met.
- 18 at year-end: If the child does not have earned income that exceeds half of his or her support, the Kiddie Tax applies if the other three requirements are also met.
- 19–23 at year-end: If the child (1) is a student and (2) does not have earned income that exceeds half of his or her support, the Kiddie Tax applies if other three requirements are also met. The child is considered to be a student if he or she attends school full-time for at least five months during the year.
Here’s an example: A child who is 16 at 2018 year-end and made $2,700 of earned income and $4,900 of unearned ordinary income from capital and gains and interest would have a standard deduction of $3,050 ($2,700 of earned income + $350).
The child’s taxable income would be $4,550 ($2,700 earned income + $4,900 unearned income – $3,050 standard deduction).
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2018 Estate and Trust Income Tax Rates |
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If taxable income is: |
The tax is: |
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Not over $2,550 |
10% of taxable income |
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Over $2,550 but not over $9,150 |
$255 plus 24% of the excess over $2,550 |
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Over $9,150 but not over $12,500 |
$1,839 plus 35% of the excess over $9,150 |
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Over $12,500 |
$3,011.50 plus 37% of the excess over $12,500 |
To calculate the amount of taxable income that is subject to the Kiddie tax, subtract the unearned income threshold from total income. In this case, $2,800 ($4,900 – $2,100) will be taxed at the trust and estate tax rates shown in the chart above.
The child’s Kiddie tax amount comes out to $255 + $250(.24)= $315. The remainder of taxable income ($4,550 – $2,800 = $1,750) is taxed at the 10% rate for a single taxpayer.
The total federal tax bill comes to $490 ($315 Kiddie Tax + $175 regular tax).
If you have questions about the kiddie tax or options related to passing your wealth to the next generation while reducing taxes as much as possible, please reach out any time.