The Tax Cuts and Jobs Act means a higher tax rate for kiddie tax. Let’s start out with what exactly kiddie tax is.
The kiddie tax is applicable if:
- The child’s unearned income was more than $2,100,
- The child meets one of the following age requirements:
- The child was under age 18 at the end of the tax year,
- The child was age 18 but less than 19 at the end of the tax year and the child’s earned income didn’t exceed one-half of the child’s own support for the year (excluding scholarships if the child was a full-time student), or
- The child was a full-time student who was at least 19 and under age 24 at the end of the tax year and the child’s earned income didn’t exceed one-half of the child’s own support for the year (excluding scholarships)
- At least one of the child’s parents was alive at the end of the tax year
- The child is required to file a tax return for the tax year, and
- The child doesn’t file a joint return for the tax year.
You may be asking “so what?” right now. The issue with the kiddie tax is that the unearned income (income from pass-through entities, interest, dividends, royalties or capital gains) will be taxed at trust tax return rates.
In the past, the kiddie tax meant the child’s unearned income was taxed at the parent’s rates. Now, it’s the higher trust tax rates. It’s even more important to have a strategy for making your kids part of your business. It’s possible, but you need a little more forethought.
Bottomline, the kiddie tax makes sure there is no tax benefit in moving unearned income to your children in this way. And now, in 2018, it’s even more costly.