Annette Nellen _ Kiddie Tax

The TCJA changed the tax calculation for the kiddie tax which results in the child possibly having a higher marginal tax rate than the parents. This was highlighted by survivors of deceased members of the military in that a pension a child received was subject to more tax in 2018 than in prior years. A report on, “This Year’s Tax Cut Cost Some Gold Star Families Dearly,” 4/23/19, included an example of a child paying tax of about $1,150 on the benefits but owing $5,400 for 2018. This child’s parent is in a lower bracket than 37%.

While the TCJA does make the calculation one where the child can compute the tax without the need for the parent’s return, using the tax rate schedule for trusts where the 37% bracket is reached at just below $13,000 is wrong. Query – Why didn’t Congress say to use a rate structure 20 times the trust income tax bracket or some other percentage?

This issue caught the attention of some in Congress with proposals offered for relief for these benefits. S. 1370 and H.R. 2481 propose to treat the benefits as earned income so they are only taxed at the child’s tax rate. H.R. 2716 would not apply the TCJA changes to these benefits (so apparently still taxed at the parent’s marginal tax rate). H.R. 1994, a retirement bill passed by the House in May 2019 would change the kiddie tax calculation back to pre-TCJA times.

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The “sprinkling” proposals issued in July 2017 were amended in December 2017 effective for the 2018 taxation year.

As you may recall, the July proposals were designed to tax at the top rate, individuals now over age 18 who are in receipt on what is called “split income” or TOSI (tax on split income). Before 2018, the TOSI was called a “kiddie tax.”

For 2018, the TOSI rules extend to family members who are not active in the business that are receiving dividend income on any type of shares they hold and on capital gains on the sale of shares that are not qualified small business corporation shares. The pre-2018 rules applying to those under age 18 did not extend to capital gains on the sale of shares. Read More

John Dundon

The most common year end tax planning questions generally have been revolving around the implications of sheltering and feeding fully grown and educated children as flying the coop has become increasingly difficult for the current generation of young adults. “Hanging” at Mom and/or Dad’s place as a young professional is the new ‘thing” to do. If you can…

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TaxConnections Member John Dundon

The 15 Best Year End Tax Tips To Activate Before Midnight December 31st are as follows:

1. You may want to pay contested taxes to be able to deduct them this year while continuing to contest them.

2. You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction.

3. Give generously to both family and friends. Rich families stay rich by aggressively giving their money away to members in their clan. Remember you cannot take it with you when you go.

4. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. Read More

The Kiddie Tax

The kiddie tax is a special tax on children under age 18 who have net investment income over $2,000. It became part of the tax law when the 1984 Tax Reform Act was signed by President Reagan. The law was designed to prevent high income taxpayers from registering investments and other property producing investment income in the name of their children and having the income reported on the child’s tax return which would be taxed at a much lower rate than the parents.

The child’s net investment income can be reported in two ways: (1) on the parents return using form 8814 or (2) on the child’s return using form 8615. If it is reported on the child’s return, the net investment income over $2,000 will be taxed at the parents highest tax rate. Read More