A fix for the Kiddie Tax fiasco is included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was attached to the recently passed Appropriations Act of 2020.
The Cause of the Problem
The Tax Cuts and Jobs Act of 2017 changed the so-called Kiddie Tax, which taxed a child’s unearned income at the tax rates of the child’s parents. Starting in 2018, however, the Kiddie Tax was based on the much higher tax rates for estates and trusts.
This significantly increased the tax rates that apply to the taxable portion of college grants, scholarships and fellowships and to other benefits which are received by families. It also caused low- and middle-income children to be taxed at much higher rates than their parents.
This table compares the 2018 income thresholds at which each tax rate applies for parents and for estates and trusts. It demonstrates that the higher tax rates for the Kiddie Tax started at much lower income levels.
|TAX RATE||PARENTS (MFJ)||ESTATES AND TRUSTS|
Families were shocked when they saw the increase in their tax liability from the Kiddie Tax changes. Many families had to scramble to find the money to pay the big tax bills.
Undoing the Damage
The recently passed bill repeals the change to the Kiddie Tax, reverting to the rules that were in effect before 2018.
This change is effective for tax years that begin after December 31, 2019.
However, the legislation allows taxpayers to elect to have the change apply retroactively to the 2018 and/or 2019 tax years. Taxpayers will probably have to file amended federal income tax returns to claim a refund of the excess tax.
The tax advisers at Grant Thornton can assist you with the required filings regarding the Kiddie Tax and other US tax filings.