Unearned income can be taxed at 37%

Congress first enacted the so-called Kiddie Tax rules as part of the 1986 tax reform. Yes, ancient history but the reason given was to prevent parents and grandparents who were in high income tax brackets from shifting income (especially from investments) to children and grandchildren who were in a lower tax bracket. Congress revamped this tax under the new Tax Act (TCJA).

Hello again, Lynn Spencer here. The Kiddie Tax remains in place, but the rate structure has changed effective January 1st, 2018 and sunsets at the end of 2025. The TCJA now taxes a portion of a child’s net unearned income at the rates paid by trusts and estates – which can be as high as 37%. For long-term capital gains and qualified dividends, the rates can be as high as 20%, plus you must also add in the state income tax rate. Please note that this “Kiddie Tax” does not apply to children who work a part time job and have EARNED income from wages and tips. There are generally four rules that apply to children through age 24 regarding the Kiddie Tax.

If your child or grandchild expects to have in excess of $2,550 in UN-EARNED income in 2018, the tax law here is complex. Call Killingsworth Spencer in Roswell to have a CPA look into your particular situation to determine the effects and to strategize to reduce the kiddie tax.