The 2017 Tax Act simplified the Kiddie Tax. But whether your child will pay more now, or less, depends.

MP900411773_previewThe Kiddie Tax came into the tax code with the 1986 tax act and has been with us since then in one form or another. Roughly speaking, it taxes unearned income of children as though it were added to the taxable income of the parents, and then taxed at the parents’ tax bracket/rate.

More specifically, unearned income over $2,100 is subject to the Kiddie Tax if (1) the child is under 18 at the end of the tax year, or (2) 18 at the end of the tax year and the child's earned income didn't exceed one-half of the child's own support for the year (excluding scholarships if the child was a full-time student), or (3) between 19 and 23 inclusive at the end of the tax year, a full-time student, and the child's earned income didn't exceed one-half of the child's own support for the year (excluding scholarships); and at least one parent was living at the end of the tax year, the child has sufficient income from all sources to require the child to file a tax return, and the child does not file married joint. Whew!

Computing what the tax on the unearned income of the child would have been if added to the parents’ taxable income can be complicated, and required the tax code to have special rules for parents married filing separate, divorced and unmarried parents, and so on.

For tax years 2018 through 2025, the complications of being taxed at the parents’ bracket/rate is eliminated. Instead, the unearned income of a child subject to the Kiddie Tax is taxed according to the brackets/rates applicable to trusts and estates.

Unfortunately, trusts and estates have extremely compressed tax brackets. Those brackets/rates for 2018 are:

Up to $2,550                    10%

$2,550 to $9,150              24%

$9,150 to $12,500            35%

Over $12,500                   37%

For small amounts of unearned income for the child who has high-income parents, the new approach will save taxes. For higher amounts of unearned income for the child with low to mid-income parents, the new approach will likely cost additional Kiddie Tax.