On December 20, 2019, President Trump enacted the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The main objective of the new law is to expand the possibilities for people to grow their retirement savings.
But it also includes other significant tax changes that have nothing to do with retirement. One of the most important is the relaxation of the dreaded tax rule on kiddies that can penalize the income from the small investments of children and young adults. Here is what you need to know about these favorable new kiddies' tax rules.
Before the Tax Cut and Job Act (TCJA), the children's tax eliminated part of the income of a child or young adult affected without investment from work, usually an investment in the marginal tax rate if this rate is higher than what the child or young person would pay. Tax regulations for minors can be applied until the year a young adult is 24 years old.
For the 2018-2025 period, TCJA modified the pact to tax a portion of the unforeseen income of a child or young adult affected by the fees paid for funds and goods. This change could make child taxes more expensive for a child or young adult with substantial unrestricted income, as confidence and equity rates rise rapidly to 37% for ordinary profits at short term and capital gains and more—20 % for capital gains and long-term dividends. For 2019, the maximum rate of 37% of regular income was only $ 12,951 in taxable income under the property and trust commission program. For 2018, the maximum rate of 37% reached only $ 12,751.
Congress has expressed concern that the change to the TCJA would unfairly raise federal income tax bills for some children and young adults, including those who are survivors of deceased soldiers, first responders, and emergency medical workers. The secure Act retroactively repeals the modification of the tax rate TCJA for children for all children and young adults. It restores the calculation of the pre-TCJA tax for children so that it is again based on the parents' marginal tax rate. It will be a massive saving for children and young adults with significant investment income.
Although the SECURE Act's favorable modification to the Kiddies tax rates for minors is generally effective for 2020 and further than, you can choose to apply the adjustment of tax savings for 2018 and 2019 returns of Kiddies Tax victims. So if you have a family who is a victim of family tax, an amended 2018 order may be in order.
Under the kiddies tax laws, a portion of a child's or young adult's net income may be taxed based on federal tax rates paid by the child's parents. This is unfavorable because parents generally have a much higher tax bracket. Therefore, Kiddie's tax impact on a child with significant unexpected income can be considerable. But it is not as important as before the SECURE Act.
When calculating the federal income tax account for a dependent child or a young adult subject to child tax, the child can deduct the value of the standard deduction.
• For 2018, the standard deduction for a single child is the greater of: (1) $ 1,050 or (2) earned income + $ 350, which does not exceed $ 12,000.
• For the year 2019, the standard is the larger of: (1) $ 1,100 or (2) earned income + $ 350, which does not exceed $ 12,200.
• For the year 2020, the standard deduction is the larger of: (1) $ 1,100 or (2) with income + $ 350, not exceeding $ 12,400.
The Kiddies tax can be applied until the year a child or a young adult turns 24 years old. For people between 19 and 23 years old, at the end of the year, the child tax can only be applied if the child or young adult is a student. But a child aged 18 or under is almost always exposed to child tax at the end of the year. More specifically, the children's tax applies when the following four conditions for the year in question are met:
• The child does not record a joint declaration.
• One or both parents of the child are alive at the end of the year.
• The child's unusual net income exceeds this year's limit, and the child has a positive taxable income after deduction of applicable deductions, such as the standard deduction. The unauthorized income limit for 2018 is $ 2,100. For 2019 and 2020, the limit is $ 2,200. If the unexpected income limit is not exceeded, the child tax does not apply. If the limit is exceeded, child tax only affects unusual income that exceeds the limit.
• The child or young adult complies with one of the following three age-related rules due to their age at the end of the year and the following other factors:
• Seventeen years old or less: if the child is 17 years old or less at the end of the year, the child tax will be applied if the other three conditions are met.
• Eighteen years old: if the minor is 18 years old at the end of the year and does not have an income higher than half of his maintenance, the child tax will be applied if the three other conditions are met. Support does not include amounts received in the form of grants.
• Between 19 and 23 years old and the student: if the child is between 19 and 23 years of age at the end of the year and s/he is a student, and s/he has no income above half the age, the tax for kiddies applies if the other three requirements are met. The child is considered a pupil if s/he attends school full time for at least five months during the year. Support does not include amounts received in the form of grants.
Let us throw in some examples to help you understand the new kiddie tax rules.
Example 1: John will be 17 years old on December 31, 2020. This is subject to the age rule 1 for 2020; he will be subject to tax for children if the other three conditions are met.
Example 2: Katherine will be 21 years old on December 31, 2020. She will graduate from university in May 2020 but is determined to remain unemployed for the rest of this year. Thus, she is subject to the kiddies tax 2020, according to the age rule no. 3, because she studies full time during the first five months of the year and will, if necessary, have a meager income throughout the year.
First, add the child's net income and unusual net income. Reduce the child's standard deduction to obtain a taxable profit. The portion of taxable income made up of net income is taxed at regular rates for a single taxpayer. The portion of the taxable profit made up of unforeseen net income that exceeds the limit of unauthorized income ($ 2,100 in 2018; $ 2,200 in 2019 and 2020) is subject to kiddies tax and the parental tax rate. This rate can reach 37% for short-term profits and ordinary income and 20% for long-term profits and dividends. However, parents must earn a lot of money to apply these maximum rates.
Don Bell Law