2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

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KIDDIE TAX The law treats taxation of net unearned income of certain children differently than other income. Pre-2018, the child paid tax on net unearned income over a specified level ($2,100) at the parent’s marginal rate (potentially as high as 39.6%). However, in many situations, the rate was much lower. This law is intended to avoid shifting of investment income from high-rate parents to their low-tax rate children. The law required the child to wait until the parents’ tax return was completed to make this calculation. The TCJA adjusted the Kiddie Tax so that it is no longer based on the parents’ marginal tax rate, but is based on

trust rates. Note that the 37% rate applied to trusts in 2018, starting at income of $12,501, whereas married joint filing parents reached this rate at $600,000. This produced a substantial tax increase for some low and middle-income families. This has been particularly problematic for dependent children of service members who died on active duty and for those with scholarships used for expenses other than tuition and books, which are taxable. Congress recognizes the political nightmare and has indicated an intention to fix the problem, possibly by returning to the old law. One proposal would permit families to amend 2018 tax returns to elect to use new Kiddie Tax rules, which produce the better result. No action has been taken as of this writing.

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