You’ll Get a Little Less of a Soaking in 2020!
Changes to the tax code mean that your little squirts no longer “take a bath” at tax time!
“Kiddie tax” has long been in place to restrict parents from re-arranging their income to take advantage of the lower tax rates of their children. Prior to the Tax Cuts and Jobs Act (TCJA) in 2017, kids with unearned income saw their first $1,100 of unearned income tax-free, and the next $1,100 taxed at the child’s rate. Earnings over $2,200 were taxed at the parent’s rate.
However, TCJA changed that rate to the trust income tax rates, which could be much higher than the parent’s rate and put a “damper” on the child’s unearned income–tax-wise. This was because the trust and estate tax rate means that the maximum tax rate is reached at much lower levels, thereby causing prohibitive tax impacts to little tykes and their parents.
To rectify the issue, The SECURE Act has now reverted the taxation on this type of income back to the tax rates of the parents effective for 2020 and beyond with the option to apply the rules to your 2019 tax returns along with the ability to amend 2018. Remember, qualified dividends are still subject to capital gains treatments, which may change the scenario in computing the taxes on unearned income.
This change could be more…or less impactful depending upon your family’s situation. Hopefully, it will all come out in the wash!
Give me a call if you have any questions.
