Kiddie Tax Fix in SECURE Act

On January 1, 2020, the SECURE Act set new rules for distribution of retirement assets after death. To read our previous blog on the SECURE ACT, click here. However, a less publicized provision in the SECURE Act fixes the “Kiddie Tax” which could save families thousands in taxes.

“Kiddie Tax” refers to special tax rules on certain unearned income of children. Unearned income includes interest, capital gains, dividends, and other income which the child did not earn by working. This income has long been taxed at rates other than the child’s tax bracket to dissuade parents from shifting income from their high tax bracket to their child’s lower tax bracket by methods such as gifting investment assets to the child.

Prior to 2017’s Tax Cuts and Jobs Act (TCJA), children with unearned income had received the first $1,100 of unearned income tax-free, and the next $1,100 was taxed at the child’s rate. Earnings over $2,200 were taxed at the parent’s rate.

TCJA changed the tax on this income to the rates applicable to trusts, which for 2019, pay the highest marginal rate of income tax (37%) on amounts earned above a mere $12,750. By contrast, married parents filing jointly only reach the 37% marginal rate for income amounts in excess of $612,351.

SECURE addresses this issue by reverting the taxation on this type of income to the tax rates of the parents for tax years beginning after 2019, with the option to use those new rates for 2019 and amend 2018. This fix could provide a substantial benefit in situations such as where a dependent holds an interest in rental real estate or receives a significant income allocation from a closely held business.

As we head into tax season this year, make sure you discuss this new issue with your tax and estate planning teams.

Contact us today if you have questions about this topic or if we can assist you with your Estate Planning needs. 

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