2020 Year End Tax Planning – Kiddie Tax Update

The Kiddie Tax is back for tax years beginning after December 31, 2019. That means it will apply to your (or your kid’s) 2020 tax return.

So what happened is the SECURE Act reinstated the Kiddie Tax that had previously been suspended by the Tax Cuts and Jobs Act (TJCA) that was passed in 2017. The suspension of the Kiddie Tax was a revenue raiser and taxed the unearned income of a child at the same rates as estates and trusts. The Kiddie Tax taxes the unearned income of a child at the parent’s tax rate if those rates are higher than the child’s tax rate.

This Kiddie Tax applies to the child’s unearned income, like interest, dividends, and capital gains. It doesn’t apply to earned income, such as wages for working in their parent’s business.

This is important because the TCJA reduced the individual tax rates for many people. The suspension of the Kiddie Tax frequently forced the child’s unearned income into the higher tax rates for Trusts and Estates. To see how this works, check out the 2020 tax rates for individuals compared to the tax rates for trusts & estates.

Comparison of Individual Tax Rates to Trust & Estate Tax Rates for 2020
Comparison of Individual Tax Rates to Trust & Estate Tax Rates for 2020

As you can see, the income for unearned income of children can be taxed at much higher rates under the TCJA rules. The SECURE Act allows this income to be taxed at what is probably a lower rate that the parent’s income is taxed at.

Check with your tax preparer to see if this applies to you or contact me on my contact page.