How the Change with the “Kiddie Tax” May Change Your Gift Giving

Pittsburgh Tax Pros

Have you heard of the "Kiddie Tax?" The Kiddie Tax is a term that refers to tax law created in 1986 that deals with investment and unearned income tax for individuals under 17 years of age. It is a tax that is imposed on children whose investment and unearned income for a year is higher than an annually determined threshold. It was originally designed to end income splitting, or the practice of high-income earners shifting some of their income to relatives in lower tax brackets, usually by giving investment assets to children directly or through trusts.

Our North Hills Personal Tax Pros can help you determine how the new Kiddie Tax changes will affect you at tax time. Contact us today at (412) 931-1617. 

The Tax Cuts and Jobs Act passed in December 2017 has greatly simplified the Kiddie Tax. The original Kiddie Tax had the children paying taxes on their investment income at their parents’ highest tax rate. It required a separate form and some complicated computations. It also required parents to share their tax information with their children.

Starting for the 2018 tax year (and valid through 2025), anyone subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate. While the new rule simplifies computation of the tax and means parents don’t have to share their data, it also means that many who are subject to the Kiddie Tax will pay higher taxes than they would have under the old rules.

For example, staring in 2018 the maximum 20% capital gains tax is imposed on trusts when taxable income reaches $12,700. Previously, that rate wasn’t imposed on an individual until taxable income exceeded $400,000. Higher tax rates are imposed on trusts at much lower income levels than for individuals. This can be important in determining how a parent or grandparent should work around estate planning and gifts of investments for children or grandchildren.

Some children will actually be subject to lower taxes under the new tax laws. If a child's parents are in the top tax bracket and the child receives only a few thousand dollars of investment income, the income will be taxed at a lower rate under the new rules. The child won’t be taxed based on the top tax bracket as they would have previously.

If you have any questions, our tax team is on hand to help!