The “Kiddie Tax” is a tax on the “unearned” income of a child. In other words, it applies to the child’s income from interest and dividends, but not from wages from a job like their paper route or McDonald’s. The Kiddie Tax has been around since 1986 and applies to the unearned income of a child over a certain small amount. In 2019, that amount is $2,200. Prior to 2018, if a child had unearned income above that threshold, it would be taxed at the higher of the child’s marginal income tax rate or the parent’s marginal rate.
That was bad enough. But, the Tax Cuts and Jobs Act of 2017 taxes the unearned income of the child at the rates applicable to trusts and estates, which for amounts over $12,750 (in 2019) is 37%.
The Kiddie Tax applies if:
- the “child” isn’t married filing a joint tax return for the year,
- has unearned income over $2,200 (in 2019),
- has a living parent at the end of the tax year, and
- Either Is under age 18 at the end of the tax year, or is age 18 and provides less than half their support from earned income, or is a full-time student under age 24 and doesn’t provide at least half their own support with earned income.
A “child” for these purposes includes adopted and stepchildren.
If the Kiddie Tax would apply, you may want to consider ways to keep the unearned income from being taxed to the child since.
For example, if the child is a beneficiary of a trust, the trustee may be able to exercise discretion to distribute the income to other beneficiaries to whom the Kiddie Tax does not apply and who are in lower income tax brackets. Or, the trustee could just keep the income in the trust. While keeping the income in the trust may not lower the income tax rate, there may be other advantages to keeping the money in the trust, such as asset protection, divorce protection, etc.
Another option to consider would be for the adult “child” to consider giving the income producing asset to someone else in the family who is in a lower income tax bracket.
Example: Mary is 18 and expects to be subject to the Kiddie Tax until after age 24. Mary is an only child and her parents are in a low-income tax bracket and do not have estate tax or Medicaid concerns. Mary has an asset that is generating income each year which would be subject to the Kiddie Tax and taxed at 37% in her hands. She could give the asset to her parents. In that case, it would be taxed at her parents’ lower income tax rates.
For more information on the Kiddie Tax, see this article from Forbes.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128