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Defeating the Kiddie Tax after the TCJA Tax Reform

If your family has trouble with the kiddie tax, you face some new wrinkles for tax years 2018 through 2025 thanks to the Tax Cuts and Jobs Act (TCJA) tax reform. This is one of the many areas where tax planning can pay off.

For 2018–2025, the TCJA tax reform changes the kiddie tax rules to tax a portion of an affected child’s or young adult’s unearned income at the federal income tax rates paid by trusts and estates.

Trust tax rates can be as high as 37 percent or, for long-term capital gains and qualified dividends, as high as 20 percent. 

Unearned income means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. So, among other things, unearned income includes capital gains, dividends, and interest.

Earned income from a job or self-employment is never subject to the kiddie tax.

Your dependent child or young adult faces no kiddie tax problems if he or she does not have unearned income in excess of the kiddie tax unearned income threshold ($2,100 for 2018 and $2,200 for 2019).

And when your dependent child exceeds the threshold by only a minor amount, the kiddie tax hit is minimal and nothing to get too upset about.

But if your child is getting hit hard by the kiddie tax, your tax planning should consider the following:

  • employing your child so that he or she has earned income sufficient to eliminate the kiddie tax, or
  • changing the investment mix from income generation to capital growth.

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