If your family has previously had trouble with the kiddie tax, then unfortunately you will face some new troubles for tax years 2018 through 2025 thanks to the recent tax reform. To make things easier on yourself, you will certainly want to do some tax planning.
For 2018–2025, the Tax Cuts and Jobs Act changes the kiddie tax rules to tax a portion of an affected child’s or young adult’s unearned income at the federal income tax rates paid by trusts and estates.
Trust tax rates can be as high as 37 percent or, for long-term capital gains and qualified dividends, as high as 20 percent.
Unearned income means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services, such as capital gains, dividends, and interest.
Earned income from a job or self-employment is never subject to the kiddie tax.
Your dependent child or young adult faces no kiddie tax problems if he or she does not have unearned income in excess of the kiddie tax unearned income threshold, which is $2,100 for 2018 and $2,200 for 2019.
When your dependent child exceeds the threshold by only a minor amount, the kiddie tax hit is minimal and nothing to get too upset about.
But, if on the other hand your child is getting hit hard by the kiddie tax, you should consider the following as you plan for your taxes:
- employing your child so that he or she has earned income sufficient to eliminate the kiddie tax, or
- changing the investment mix from income generation to capital growth.
If your family is facing a kiddie tax problem, give us a call so that we can help you reduce or maybe eliminate it all together: (732) 566-3660.