May 21, 2018

Do You Need to Worry About the Kiddie Tax? – Mendes Weed, LLP Assists Families and Businesses with Their Estate Planning, Tax, and Business Needs

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Mendes Weed, LLP has combined resources and knowledge to assist you and your family throughout any phase of your life.  We assist clients with estate planning, tax, family law, business law, trust administration, probate, and elder law.

Because we assist families and small businesses in so many important areas of law, we understand which changes in the laws, including tax law, will affect our clients.

Did you know that minor children are subject to a “kiddie tax” on unearned income?  The idea behind this rule is that the taxing agencies do not want parents and grandparents to be able to shift some of their income tax burden to their children without those children also being subject to tax.

The “kiddie tax” applies to children under age 18, children who are 18 at the end of the year and have earned income less than one-half the cost of their support, and full-time students between 18 and 24 with earned income less than one-half of their support.

Prior to the 2017 Tax Cuts and Jobs Act, children were taxed on unearned income over $2,100 at their parents income tax rate.  Now, after the Tax Cuts and Jobs Act has been passed, children are taxed on income over $2,100 at the trust rate, which could end up being much higher.  Unearned income over $12,500 will be taxed at 37%.  (Note that unearned income below $2,100 could potentially be shifted to children).

The good news is that children can also claim the standard deduction, which has nearly doubled from what it was in 2017.  However, children with significant investment income will likely still be hit very hard.

What can you do?

You can consider investing in U.S. Savings Bonds since interest can be deferred until the bonds are cashed in.  You can consider investing in unimproved real estate, which will appreciate but will not currently produce income (note that the “kiddie tax” provisions automatically expire in 2016).  You can open an individual IRA for the child if they have earned income to deposit (Roth is usually preferable for a child with minimal tax liabilities).  You can fund a 529 plan for the child in which earnings accumulate tax deferred.  This list of options is not exhaustive.  The idea is you want to choose investment tools that appreciate but defer income to the extent possible.

What you may not want to do is make a minor child a primary beneficiary of a grandparents’ or parents’ substantial IRA depending on the circumstances, at least not until the law changes.  Any income the child receives will likely be taxed at the highest tax rate for trusts.

If you have questions about the new tax laws and how they affect your family, we hope you will reach out to us.

If you have questions about which business entity might be right for you, you should reach out to a tax lawyer who can assist you with your questions and concerns.

Mendes Weed, LLP is here to help you if you have any questions.  (925) 390-3222.

 

The tips and materials provided on this page are for informational purposes only, offered as public service. No information on this website should be considered legal advice or used as a substitute for legal advice. For legal advice, you should contact an attorney directly.