Tax Reform Eliminates Kiddie Tax Complexity by Jeffrey M. Mutnik, CPA/PFS
Posted on February 21, 2018 by Jeffrey Mutnik
Congress first introduced the Kiddie Tax in the 1980s to prevent high-net-worth families from paying overall lower taxes on their investment income by transferring income-generating assets to their young children in a lower tax bracket. For example, during the 2017 tax year, unearned income that exceeds $2,100 from investments held by children age 19 and younger, or full-time students under the age 24, is taxed at the parent’s marginal tax rate, which could be as high as 39.6 percent. However, under the Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017, the parent’s income and marginal tax rate are disregarded.
Instead, beginning in 2018 and through the end of 2025, a dependent child’s unearned investment income (from capital gains, dividends and interest) in excess of $2,100 is subject to the trust income tax rates, which are capped at 37 percent on income above $12,500. In addition, earned income for wages, salaries and other compensation a dependent child receives for providing personal services is subject to taxation at the single taxpayer rates, which can be as high as 37 percent on income exceeding $500,000. While this modification makes the taxation of such income simpler, there are other important factors that families should consider in their tax planning.
For example, under the TCJA, the highest 37 percent tax brackets for trusts and estate in 2018 kicks in at $12,500, a much lower threshold than the top 37 percent rate that would have applied to parents with $600,000 in taxable income before the new law was enacted. As a result, the benefits of the new law will depend on the amount of a child’s unearned income during a tax year. In most cases, transferring substantial investment assets into children’s names will potentially lower a family’s overall federal income tax liabilities in 2018 and through 2025, when this provision is set to expire. However, families should be mindful of the gift tax and asset control issues they may face when contemplating transfers to family members.
The advisors and accountants with Berkowitz Pollack Brant work with U.S. and foreign families to protect wealth and maintain tax efficiency while complying with complex global tax laws.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.