The Tax Cuts and Jobs Act greatly simplified the Kiddie Tax. The original Kiddie Tax required children under the age of 18, or under age 24 if they are a full time student, to pay taxes on their unearned income (interest, dividends, capital gains, rents, etc.) over $2,100 at their parents’ highest tax rate. It also required a separate form and some complicated computations, as well as requiring parents to share their tax information with their children.
Beginning in 2018 and applicable through Dec. 31, 2025, children who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate, which means the computation is greatly simplified and parents no longer have to share their tax information with their children. But the new rules mean many who are subject to the Kiddie Tax will pay higher taxes than they would have under the old rules as higher rates are imposed on trusts at much lower income levels than for individuals. For example, the maximum 20 percent capital gains tax is imposed on trusts when taxable income reaches $12,700. Last year, that rate wasn’t imposed on an individual until taxable income exceeded $400,000.
Owners and grandparents, with children being paid minimal wages by the privately held staffing company, should monitor a child’s unearned income sources carefully before giving additional income-producing investments or selling long-term capital assets held in the child’s name. You may create additional tax upon the child that could have otherwise been managed with a little forethought and planning.