Prior Kiddie Tax Rule Restored

Prior Kiddie Tax Rule Restored

The tax code generally attempts to prevent high-income taxpayers from shifting taxable income to their children who may be subject to lower tax rates. These rules are complicated and have recently changed again. Under the Tax Cuts and Jobs Act of 2017 (TCJA), effective in 2018, children with unearned taxable income (such as interest or dividends) greater than $2,200 were subject to trust and estate income tax rates (rather than their parents’ marginal tax rate as in prior years). This change in the computation of the “Kiddie Tax” was costly for many taxpayers because trust and estate income tax brackets accelerate much faster in comparison to individual income tax rates. However, these changes were effectively nullified when the “Further Consolidated Appropriations Act” (FCAA) was enacted at the end of 2019.
 
For 2020 and subsequent tax years, the Kiddie Tax will return to the pre-TCJA rules where a child’s unearned income is taxed at his or her parents’ marginal tax rate. In addition, the FCAA enacted provisions which allow a child to elect between TCJA rules and pre-TCJA rules for computing the Kiddie Tax for tax years 2018 and 2019. If you filed 2018 or 2019 income tax returns and your child was subject to the trust and estate income tax rates, you should consider whether an amendment would be beneficial.
 
Deferring or shifting taxable income to a child requires diligence on the part of the taxpayer. Please contact us if you have any questions regarding these changes.