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 Military.com, “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.