Mar 01, 2020
By Brandon Yuska, CPA Senior Manager at Terry Lockridge & Dunn
Prior to the Tax Cuts and Jobs Act (TCJA), children with unearned income had received the first $1,100 of unearned income tax-free, and the next $1,100 was taxed at the child’s rate. Earnings over $2,200 were taxed at the parent’s rate. This was commonly referred to as the “Kiddie Tax”. TCJA changed that rate to the trust income tax rates, which could be much higher than the parent’s rate.
The SECURE Act, signed in December 2019, has been modified for 2019 (and retroactively for 2018) the rules related to the tax for certain children who have unearned income to allow you to elect to calculate your tax based on the tax rate of your parent. For tax year 2019, you can elect this alternative application for the tax on your child’s unearned income. You will complete Form 8615. If this election is made for 2019, include a statement with your return specifying “election to modify tax of unearned income.” The statement can be made on the return (for example, on line 7 or at the top of Form 8615) or on an attachment filed with the return.
For tax year 2018, if you choose to modify the tax on your child’s unearned income using the tentative tax based on the tax rate of the parent, use the 2018 Instructions for Form 8615 and file an amended return, Form 1040-X. If this election is made, include a statement or an attachment with the amended return specifying “election to modify tax of unearned income.”
Reminder: Unless you elect to calculate the child’s tax based on the tax rate of the parent, all net unearned income over a threshold amount of $2,200 for 2019 will be taxed using the brackets and rates for estates and trusts.
Before deciding which rates to use for 2019, and whether or not to file an amended tax return for 2018, please talk with your tax accountant to determine if there would be sufficient savings in taxes. Feel free to reach out to Brandon at firstname.lastname@example.org, or your tax accountant at Terry Lockridge & Dunn. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.