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Tax Reform - Kiddie Tax

Since 1986, taxpayers and tax return preparers have had to wrestle with the Kiddie Tax rules. Over the past 30 years, Congress tinkered with those rules several times and made them overly complex. While the Good News is the Kiddie Tax is repealed for 2018, get prepared for the Bad News.

The Good, The Bad and The Ugly

One of the unexpected changes included in The Tax Cut & Jobs Bill was the repeal of the so-called Kiddie Tax for 2018. That's the Good News.

The Kiddie Tax will, however, still apply for 2017 tax returns. In a nutshell, this tax was intended to tax a child's investment income (dividends, interest and capital gains) as if the parent included the income on their tax return.

The Kiddie Tax involved a convoluted mechanism whereby the child's income was either added to the parents' tax return to determine the tax, or the child filed their own tax return using the parents' tax rate to come up with the tax figure. If the calculation involved two or more children, it became exponentially more complicated.

So what is the Bad News?

Beginning with 2018, the tax will only be reported on the child's tax return, but the tax will be based on the tax rates applicable to Trusts. For relatively low amounts of investment income, this won't matter much, but could become a problem for higher amounts.

Under the new rules for 2018, the first $1,050 of investment income for a child will be tax-free. The next $1,050 will be taxed at 10%. Beyond $2,100, the Trust tax rates kick in, which quickly reach 37% for income above $12,500.

While the complexity of the Kiddie Tax is gone for 2018, the ugly prospect of children paying higher taxes is very real. Parents will need to be much more proactive in managing their children's investments to minimize or avoid these higher taxes.

Be sure to let us know if you have questions or need assistance in gauging your child's exposure to this new tax.
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