The IRS has provided guidance on the election to calculate the kiddie tax for 2018 and 2019 using the child’s allocable parental tax instead of the tax rates for trusts and estates. The election is generally made on the taxpayer’s return or by attaching a statement to the return. A taxpayer can choose whichever method provides the lowest tax liability for 2018 and 2019. If the election is made for the 2018 tax year, an amended return will need to be filed to claim a refund.
What is the Kiddie Tax?
A child’s income tax liability is generally computed in the same manner as for any other individual. However, a child’s unearned income is subject to the kiddie tax if it exceeds a threshold amount ($2,100 for 2018 and $2,200 for 2019). A child’s unearned income for this purpose is any income other than from wages, salaries, or other payments received for work (for example, interest, dividends, and capital gains).
A child’s unearned income has been traditionally taxed at his or her parent’s tax rate if it results in a higher tax liability. This involved calculating the child’s allocable parental tax depending on the parents’ taxable income and if there were other children in the family. Alternatively, the parents can elect to include the child’s unearned income on their return by filing Form 8814 to avoid the kiddie tax.
Change in Kiddie Tax Rates
The Tax Cuts and Job Act (TCJA) attempted to simplify the kiddie tax calculation by taxing the child’s net unearned income using the same tax rates as used for trusts and estates for tax years beginning in 2018. However, this has led to higher tax liability for certain low- and middle-income families.
Most notably affected were families of military members who received survivor benefits (Gold Star families) and families who received taxable scholarships or Native American per capita distributions. These items of income are not generated from the performance of personal services and are taxed under the kiddie tax rules as unearned income.
The income thresholds for applying the trust and estate rates are lower than for individuals (i.e., the child’s parents). For example, the taxable income threshold for 2019 for the top 37 percent tax rate is only $12,750 for trusts and estates. In contrast, the taxable income threshold for the top 37 percent rate for a child’s parent(s) for 2019 is $306,175 if married filing separately, $510,300 if single or head of household, and $612,350 if married filing jointly.
Election to Use Allocable Parental Tax
To alleviate this problem, Congress enacted new legislation that reverts the kiddie tax back to the original rates. After 2019, kiddie tax liability on unearned income is calculated using the tax rate of the child’s parents if it would result in a higher tax liability. Beginning in 2020, the tax rates for trusts and estates will no longer be used to calculate the kiddie tax.
For the 2018 and 2019 tax years, the default to calculate the kiddie tax remains the tax rates for trusts and estates. However, a taxpayer has the option to use the allocable parental tax for these years. The taxpayer will want to calculate the kiddie tax both ways in 2018 and 2019 to determine any tax savings by making the election.
Election Made on Return or Attachment
Form 8615 is used to compute the kiddie tax and must be attached to the child’s tax return for the year. The election to calculate the kiddie tax in 2018 and 2019 using the allocable parental tax instead of trust and estate rates is made by including a statement with the child’s return.
The statement can be made directly on Form 8615 or as an attachment to the child’s return specifying “election to modify tax of unearned income.” The taxpayer then calculates the kiddie using the appropriate worksheet in the Instructions to Form 8615.
For the 2018 tax year, the taxpayer uses the revised instructions for Form 8615 for 2018 and must file an amended return to claim a refund. The election may be made for 2018, 2019, or both tax years.
By John Buchanan, J.D., LL.M.