The Tax Cuts and Jobs Act (“TCJA”), passed in December 2017, changed how certain children are taxed on their unearned income -- also known as the "Kiddie Tax." Prior to TCJA, a child who had not turned 18 years old or a child whose earned income did not exceed half of his or her support and was either 18 years old or a full-time student between the ages of 19-23, was taxed at their parent’s tax rate on his or her unearned income in excess of $2,100. Unearned income includes all taxable income other than earned income, including taxable interest, dividends and capital gains from investment accounts.
For tax years 2018 to 2025, TCJA changed the law so that these children are effectively taxed at the trust and estate income tax rates on the same income. Before TCJA, a child subject to the Kiddie Tax had to wait to file his or her tax return until their parents' returns and effective tax rates were finalized. This frustrated families and tax professionals since a child’s unearned income is often available early in the year on Form 1099. This change will allow children to file their tax returns much earlier as they no longer need to wait for their parents' more complex returns to be completed.
TCJA’s change to the Kiddie Tax could also result in a child paying more tax than they would have under pre-TCJA law. This is because trusts and estates have more compressed tax brackets compared to individuals resulting in income being subject to higher tax rates. For example, in 2018 trusts and estates are taxed at the top rate of 37% on taxable income over $12,500, while a married couple filing jointly is taxed at the same top rate on taxable income over $600,000.
Contact your Friedman tax professional to learn more about how the Kiddie Tax and changes made by TCJA impact your children.