Relief from the ‘Kiddie Tax’ Mess

Tax Changes for the Better

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
24% $165,000 $2,550
32% $315,000 n/a
35% $400,000 $9,150
37% $600,000 $12,500

 

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.

About the Author
Ariel Katz CPA is an expert in United States taxation and accounting for individual, corporate, and non-profit companies, and advises many companies in the area of tax structuring and planning. Mr. Katz is highly involved in academic teaching and professional training. He conducts various activities, including: Senior lecturer in the accounting department in the field of corporate taxation and partnership taxation at the College of Management Academic College. His hobbies include learning Torah, chess, bicycle riding, and running.
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