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Q & A on Child Tax Liability

Once upon a time, high-income families could reduce their tax burden by shifting income to their children. Many took advantage of this loophole by putting investments in their child’s name to reap the benefits of their lower tax rate. Then, the kiddie tax was introduced in the mid-1980s, and increased the child tax liability. The new regulation taxed the passive income of children under age 17 based on the parents’ marginal tax rate, with some additional considerations.
The Tax Cuts and Jobs Act of 2017 (TCJA) was the next piece of legislation to influence the kiddie tax. Intended to simplify the tax code, TCJA also changed the taxation structure on a child’s unearned income. As a result, your child’s tax liability may have increased significantly.

Here are answers to some questions you may have:

Q: What is the kiddie tax?

A: The kiddie tax is a tax on unearned income, such as interest income, capital gains or dividends. It does not apply to wages earned from employment, such as summer jobs or internships. It was created to deter parents from trying to avoid paying higher taxes by shifting sources of unearned income to their children.

Q: Who is subject to this child tax liability?

A: Dependent children under 19 years old (or under 24 and a full-time student) with unearned income greater than $2,200 for 2019 are subject to this tax.

Q: How has the kiddie tax changed?

A: Under the TCJA, dependent children are now taxed using the trust and estates schedule instead of the parents’ marginal tax rate, illustrated below.

Unearned Income Tax
$2,200 – $2,600 10% of taxable income
> $2,600 – $9,300 $260 plus 24% of the excess over $2,600
> $9,300 – $12,750 $1,868 plus 35% of the excess over $9,300
> $12,750 $3,075.50 plus 37% of the excess over $12,750


Q: How might this change affect you and your child?

A: Tax rates for trust and estates “climb the brackets” faster, which means your child may be subject to a higher tax rate than before the 2017 legislation. For example, a married couple doesn’t reach the highest tax bracket of 37% until their joint income is $612,350, but taxable income hits the top rate of 37% for trust and estates at $12,751.
If your child’s income is subject to the kiddie tax, speak to your tax advisor to assure you have the necessary documentation. Then, meet with your SYM advisor for guidance on creating a wealth plan designed to make the most of your income and your child’s.

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