Kiddie Taxes: New Rules for 2018
Like many other tax rules under the new regime, the kiddie tax rule has undergone some changes in 2018. For those of us who are unfamiliar with the concept of the “kiddie tax” it is a special tax law that was created in 1986 and imposed on individuals who are under the age of 18 (or 24 if the child is a full-time student) with unearned investment income over $2,100 according to the new tax rules.
The law was designed to prevent parents of minors from exploiting a tax loophole by gifting their children large gifts of stock. The child would subsequently realize any gains from the investments and be taxed at a much lower rate than the parents.
There have been minor tweaks and changes to this rule over time with the largest change coming from the Tax Cuts and Jobs Act signed into law by President Trump. Under the new rulebook children with unearned income (dividend and interest income) will be taxed at trust tax rates instead being taxed at the parent’s rate, the rule under the former law. The current top trust tax rate for 2018 is a whopping 37%. This is the rate imposed when income exceeds $12,500. If parents are not at the top tax rate, the child’s unearned income can become taxable at higher rates than the parent’s own income! Below you will find the schedule for the trust tax rates imposed under new law.
2018 Trust Tax Rates- Applicable to the kiddie tax rule
Income Tax Rate
$0 to $2,550 10%
$2,551 to $9,150 24%
$9,151 to $12,500 35%
$12,501 and up 37%
Trust Capital Gains Tax Rates
Income Tax Rate
$0 to $2,600 0%
$2,600 to $12,700 15%
$12,701 and up 20%
With the annual gift exclusion (the amount that a parent could gift to a child without having to file a gift tax return) being raised to $15,000 per person in 2018, the new kiddie tax rule could result in some hefty taxation when trying to transfer wealth.
Consider these new tax law changes when strategizing with your advisor, CPA and estate planning attorney to maximize the efficiency of wealth transfer and taxation.
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By: Nicholas C. Baker
Wealth Planning Advisor