Everyone who has children wants the best for them. Love and support, and financial security are things that all parents want to provide for their children. However, planning for a child’s financial success can come with some tax implications because what the government wants is their fair share of tax dollars. That is where the “kiddie tax” comes in.
What is “kiddie tax”?
The Tax on a Child’s Investment and Other Unearned Income or “kiddie tax” was enacted back in 1986 to prevent high-income parents from shifting income to lower-income children, thereby reducing the family’s overall tax liability. Under the original rules, a portion of a child’s or young adult’s net unearned income could be taxed at the federal income tax rates paid by the parents. This rate changed with the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) to less favorable estate and trust rates. However, for tax years beginning after 2019 the rates have reverted back to the parents through the passage of the Setting Every Community Up for Retirement Enhancement Act.
Who is subject to “kiddie tax”?
Children under 19 can be subject to the tax if their unearned income is above $2,200 in 2020, unless they are over 17 and providing more than half of their own support with earned income. Common unearned income for children generally includes interest, dividends, and capital gains. If you have an older child, that is age 19-24 that is a full-time student and not filing a joint tax return or providing half of their own support, they may also be subject to the “kiddie tax” with the same $2,200 threshold. A tax return will need to be filed to report the child’s income. Alternatively, if the child has unearned income under $11,000 in 2020 and meets certain requirements, the parents have the option of including their child’s income on their individual return instead of filing a separate return for the child.
Since the changes to the “kiddie tax” rate apply for 2020 and retroactively for 2018 and 2019, you should contact your tax professional if your child had significant unearned income in those years to find out if there is a benefit to amending the tax returns.
If you are unsure if your child needs to file a tax return or if you need more information about the “kiddie tax”, please contact our professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.