Dec 04, 2018
By Brandon Yuska, CPA Senior Manager at Terry Lockridge & Dunn
The Tax Cuts & Jobs Act (TCJA) made significant changes to the calculation of the kiddie tax effective January 1, 2018. The purpose was to simplify the calculation by not having the parent’s tax rate and income be a part of the calculation. This was somewhat accomplished by removing the parent’s tax income and tax rates from the calculation, but other changes have made it more complex.
Who is subject to the kiddie tax remains the same under the TCJA and, if subject to the kiddie tax in the past, they will be subject to the new kiddie tax. Usually this is a child with “net unearned income” over $2,100 and under age 18 (or if a full-time student age 19-23 before the end of the year) whose earned income does not exceed one-half of their support. Unearned income is defined the same as income a child receives from income-producing property (or investment property) such as cash, stocks, bonds, mutual funds, and real estate. Earned income continues to be defined as compensation such as salary or wages that a child earns through employment.
The kiddie tax calculation under TCJA becomes more complex due a new “earned taxable income” (ETI) calculation. Also, the kiddie tax is now computed using single tax rate tables and specified income tax brackets from the estate and trust income tax rate tables. The tax rate modifications cross referenced from the estate and trust income tax rates can shift the child’s income into higher tax brackets before lower tax brackets are full. This can result in a much higher tax on unearned income of children subject to the kiddie tax than under the old calculation.
Unfortunately, parents can no longer elect to report a child’s unearned income on their tax return using Form 8814 – Parents Election to Report Child’s Interest and Dividends. This was often convenient when children had only interest and dividends subject to the kiddie tax because parents did not have to incur the cost and hassle of filing income tax returns for their children. Children subject to the kiddie tax now will have to file their own returns and not have an option to report the unearned income on their parent’s return.
The Tax Cuts & Jobs Act changes to the kiddie tax calculation, starting January 1, 2018, ensure that there could be tax savings or additional tax due for each child subject to the kiddie tax. The kiddie tax liability for 2018 most likely could be much different than the 2017 liability.
If you have children subject to the kiddie tax, please contact Brandon at firstname.lastname@example.org, or any of the accountants at Terry Lockridge & Dunn, to review how the new kiddie tax calculation will change for 2018 with the passage of the Tax Cuts & Jobs Act. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.