Congress recently passed the SECURE Act which changed reporting for the Kiddie Tax in a taxpayer-favorable way.
The “Kiddie Tax” is assessed on a child’s unearned income (think interest, dividends, capital gains, etc.) over a threshold amount. That amount is $2,200 for 2019 and 2020. The tax applies to dependents if they are under 19 or full-time students between 19 and 23.
To give you a little history, this has been in place since 1986 to discourage families from holding investments in their children’s name to avoid tax. Before the Tax Cuts and Jobs Act (TCJA) passed in 2017, it was calculated using the parents’ marginal tax rate. In an effort to simplify reporting, TCJA changed the law starting for 2018 to instead apply trust and estate tax rates. This meant their 2018 returns could be filed early in 2019 instead of waiting for their parents’ returns to be done.
Read more about the TCJA changes here:
So yes, the returns this applied to were filed faster last year. But the estate and trust rates being applied? Not so favorable for taxpayers as the top rate of 37% is reached when taxable unearned income exceeds $12,500. Compare that to individual rates in 2018, which reach 37% for a single filer when taxable income exceeds $510,300.
The SECURE Act has now established that starting for 2020, the law will revert to using the parents’ marginal tax rate. For 2018 and 2019 tax years, taxpayers have the option to either apply trust and estate rates or go back to the marginal rates. So depending on the situation, it could be beneficial to amend a 2018 return if you have already filed.
Be sure to consult your Henry and Horne tax advisor should you have any questions.
Katie Ripp, CPA