Changes to the “Kiddie Tax”
Updated: Mar 23
The “Kiddie Tax” is an federal income tax on the unearned income of a minor, such as income earned in a first party special needs trust. The recently enacted SECURE Act provides a helpful change to the Kiddie Tax, that will mean savings for many minor trust beneficiaries.
The recently passed SECURE Act provides for many changes to retirement accounts as well as some tax-related items.
One change impacts the “kiddie tax,” which applies to the unearned income of minors generated within custodial UTMA or UGMA accounts. Unearned income above a certain threshold – $2,200 for 2019 (and 2020) – is subject to the kiddie tax. The tax was designed to prevent families from holding investments in the name of a minor to avoid or limit taxation.
Until 2018, the kiddie tax applied the parent’s marginal tax rate to unearned income above the threshold. The passage of the Tax Cuts and Jobs Act (TCJA) made changes to base the kiddie tax on the same tax schedule that applies to trusts and estates.
For 2020 and forward, the new law reverts the kiddie tax back to the previous method of applying the parent’s marginal tax rate.
Taxpayers have the option of applying either method – the tax rate associated with trusts and estates, or the parent’s marginal tax rate for tax years 2018 and 2019. A taxpayer wishing to change the method for 2018 would have to file an amended tax return. For taxpayers holding custodial accounts and filing 2019 taxes in the next few months, a key decision will be which method to use...