Tax Reform for Individuals: Kiddie Tax Changes

If you have a savings account, CD or other investment account in your child’s name, this is considered unearned income for your child. This type of net unearned income is subject to a “kiddie tax”, which prevent parents and grandparents from shifting investments to their children for a lower tax rate. The Tax Cuts and Jobs Act made changes to the kiddie tax rate structure that parents should be aware of.

What is the kiddie tax?

The kiddie tax is a tax code provision that taxes the unearned income of a child under the age of 19 and of children who are full time students under age 24 at a special rate. Unearned income includes capital gains, dividends and interest.

Previous Law

If the child’s interest, dividends, and other unearned income total more than $2,100 under old tax law, the excess income over the $2,100 threshold was taxed at the parent’s higher tax rate.

New Law

The Tax Cuts and Jobs Act revised the “kiddie tax” rate structure, but left who the kiddie tax rules apply to unchanged. Under both old and new law, the first $1,050 of a child’s unearned income is tax-free, and the next $1,050 is taxed at 10%. Under the new tax law starting January 2018 and extending through 2026, the amount above $2,100 is subject to the same ordinary and capital gains rates of estates and trusts. Under the new law the child’s tax will no longer be affected by their parents’ tax situation.

The new rates that now apply to kiddie tax are as follows:

Income Tax Rates

  • Up to $1,050 0%
  • $1,051 to $2,550 10%
  • $2,551 – $9,150 24%
  • $9,151 – $12,500 35%
  • $12,501 and above 37%

Capital Gains Rates

  • Up to $2,600 0%
  • $2,601 – $12,700 15%
  • $12,701 and above 20%

Impact on Individuals

Applying the new tax law to kiddie tax rules with the estate and trust tax rates will likely produce a higher tax bill since the income and capital gains ranges under the estate and trust tax schedule are more condensed than the rates for individuals. This increase that will take affect starting in the 2018 tax year could be considerable for some taxpayers. For example, the top 37% income tax rate applies to married joint filers at $600,000, while the top 37% rate applies to estates, trusts, and now kiddie tax at $12,500.

In addition, there is an added 3.8% federal net investment income (NII) tax that applies to taxpayers, estates and trusts, and kiddie tax rules. This additional NII tax is imposed separately on each child on the lesser of NII or modified adjusted gross income in excess of $200,000 for single taxpayers.

Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business. Contact an Anders advisor with questions on how the new tax law will affect you.