2018 ushered in a host of new individual tax provisions, courtesy of the Tax Cuts and Jobs Act. In particular, families will notice different tax treatment of the unearned income of their children, known as the Kiddie Tax. Below, we take a look at what’s changed with the Kiddie Tax under tax reform and flag planning strategies to minimize this levy.
What is the Kiddie Tax and how did tax reform change it?
Even though a child is considered a dependent on a parent’s tax return, he or she may still need to submit a federal tax return if they meet certain age and taxable unearned income thresholds. This Kiddie Tax applies to the unearned income over $2,100 of most children under age 18 and full-time college students under age 24 who don’t pay for more than half of their support (which excludes scholarships).
Before tax reform, the child’s unearned income above the threshold was subject to the parent’s income tax rates, aggregated with the unearned income of their siblings.
Under the Tax Cuts and Job Act, from January 1, 2018 through December 31, 2025, the unearned income of siblings is no longer a factor, but the unearned income above the threshold will be taxed based on the compressed tax brackets and rates for estates and trusts. Unearned income includes all types of income other than wages, salaries, professional fees and other amounts received as compensation for personal services rendered. Long-term capital gains and qualifying dividends are taxed at special capital gain and dividend rates.
The child’s earned income is taxed according to single taxpayer brackets and rates, along with the first $2,100 of unearned income.
2018 Estate & Trust Tax Brackets & Rates – Ordinary Income
| Taxable Income | Tax rate (%) |
| 0 – 2,550 | 10 |
| 2,550 – 9,150 | 24 |
| 9,150 – 12,500 | 35 |
| 12,500+ | 37 |
2018 Estate & Trust Tax Brackets & Rates – Capital Gains & Qualified Dividends
| Taxable Income | Tax rate (%) |
| 0 – 2,600 | 0 |
| 2,600 – 12,700 | 15 |
| 12,700+ | 20 |
2018 Single Tax Brackets & Rates – Ordinary Income
| Taxable Income | Tax rate (%) |
| 0 – 9,525 | 10 |
| 9,525 – 38,700 | 12 |
| 38,700 – 82,500 | 22 |
| 82,500 – 157,500 | 24 |
| 157,500 – 200,000 | 32 |
| 200,000 – 500,000 | 35 |
| 500,000+ | 37 |
How to calculate Kiddie Tax liability
Combine the child’s net earned income and net unearned income, then subtract the child’s standard deduction. For 2018, the standard deduction for a dependent child is the greater of $1,050 or earned income + $350, not to exceed $12,000. The portion of taxable income that consists of net earned income is taxed as the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income that exceeds the unearned income threshold ($2,100 for 2018) is taxed at the estate and trust tax rates.
Planning opportunities to minimize Kiddie Tax
Here are some strategies to keep a child’s unearned income below the 2018 threshold of $2,100 and avoid the Kiddie Tax. Before implementing these tactics, be sure to discuss with your RKL advisor within the context of your overall financial goals and unique circumstances.
- Incur minimal Kiddie Tax if unearned income is below $4,650. Income remains within the 10 percent bracket that would apply to single taxpayer ($2,100 + $2,550 top of 10 percent trust bracket).
- Taxable IRA distributions are considered unearned income and may trigger Kiddie Tax if received by a beneficiary under age 18 or student age 19 through 24. Consider changes to beneficiary designations as facts change.
- Gifting long-term highly appreciated stock to be sold by the child may still make sense if the stock owner and child’s parent is subject to the 20 percent capital gains rate, but there is a narrow window until the same capital gains rate applies for Kiddie Tax ($12,700 for 2018).
- Invest in stocks or tax-efficient mutual funds with modest dividends and minimal turnover.
- Invest in Series EE U.S. Savings Bonds, but cash them in during a year when the child is not subject to Kiddie Tax.
- Generate earned income more than half of the child’s support for those aged 18 through 23 and they may not be considered a dependent. When using this strategy, stay mindful of the impact to the parent’s return and claiming education credits.
Your RKL tax advisor can help you evaluate the applicability of these and other strategies as part of the year-end planning process. You’ll find even more tax reform analysis and guidance in our dedicated resource center.
