Children and Taxes
Starting in 2018 and scheduled to continue through 2025, the Tax Cuts and Jobs Act changes the rates for the Kiddie Tax. During these years, children's unearned income will not be taxed at their parents income tax rates. Instead,
all net unearned income over a threshold amount--$2,200 for 2019--is taxed using the brackets and rates for trusts and estates. These are shown in the following chart:
Kiddie Taxable Unearned Income Tax Rate
up to $2,600 - 10%
$2,601 to $9,300 - 24%
$9,301 to $12,500 - 35%
all over $12,750 - 37% (Plus 3.8% NIIT)
Trust Capital Gains rates
0% $2650
15% $2,650-$12,950
20% > $12,950 (Plus 3.8% NIIT)
This greatly simplifies the kiddie tax by applying a single set of tax rates to all of a child’s unearned income. Moreover, a child's tax rate is no longer affected by his or her parents’ tax situation or the unearned income of any siblings.
However, the new rates can be higher than the parents’ rates which would have applied under prior law. For example, the kiddie tax rate is 37% on income over $12,750. A married couple would have to have over $612,350 in income in 2019 to pay tax at this rate. On the other hand, children with smaller unearned incomes could pay less under the new tax rates.
https://www.irs.gov/taxtopics/tc553
Example of Earned/Unearned/Both in link below -
https://www.irs.gov/publications/p929#en_US_2016_publink1000203740
Ø What are the kiddie tax rules?
First $1,100 no tax, next $1,100 is at the child's’ tax rate (typically the lowest), above $2200 is taxed at the parents rate for 2017 and trust rates for 2018 moving forward.
http://www.irs.gov/taxtopics/tc553.html
Ø Must a dependent child file an income tax return?
A person who is a dependent may still have to file a return. It depends on his or her earned income, unearned income, and gross income. Responsibility of parent. If a dependent child must file an income tax return but cannot file due to age or any other reason, a parent, guardian, or other legally responsible person must file it for the child. If the child cannot sign the return, the parent or guardian must sign the child's name followed by the words “By (your signature), parent for minor child.”
If they have unearned income of $1100 (first $110 is not taxable) Any income earned in a custodial account is taxed to the child, regardless of whether it is distributed.
Earned income - Earned income includes salaries, wages, professional fees, and other amounts received as pay for work you actually perform. Earned income (only for purposes of filing requirements and the standard deduction) also includes any part of a taxable scholarship. See chapter 1 of Publication 970, Tax Benefits for Education, for more information on taxable and nontaxable scholarships. Child's earnings. Amounts a child earns by performing services are included in his or her gross income and not the gross income of the parent. This is true even if under local law the child's parent has the right to the earnings and may actually have received them. But if the child does not pay the tax due on this income, the parent is liable for the tax.
Unearned income - Unearned income includes income such as interest, dividends, and capital gains. Trust distributions of interest, dividends, capital gains, and survivor annuities are also considered unearned income.
Figure the child's tax on Form 8615 (PDF), Tax for Certain Children Who Have Unearned Income, and attach it to the child's tax return when:
1. The child's unearned income was more than $2,200
2. The child meets one of the following age requirements:
The child was under age 18 at the end of the tax year
The child was age 18 but less than 19 at the end of the tax year and the child's earned income didn't exceed one-half of the child's own support for the year (excluding scholarships if the child was a full-time student), or
The child was a full-time student who was at least 19 and under age 24 at the end of the tax year and the child's earned income didn't exceed one-half of the child's own support for the year (excluding scholarships)
3. At least one of the child's parents was alive at the end of the tax year
4. The child is required to file a tax return for the tax year, and
5. The child doesn't file a joint return for the tax year
A child required to file Form 8615 may be subject to the Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of the child's modified adjusted gross income (MAGI) over a threshold amount. Use Form 8960 (PDF), Net Investment Income Tax, to figure this tax. For more information, see Topic No. 559 and Questions and Answers on the Net Investment Income Tax.
Election to report child's unearned income on parent's return;
You may be able to include your child's interest and dividend income on your tax return. If you do this, your child will not have to file a return. To make this election, all of the following conditions must be met.
At the end of the tax year the child was under age 19 or under age 24, if a full-time student
The child's interest and dividend income was less than $10,500 for the tax year
The child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and capital gain distributions
No estimated tax payments were made for the tax year, and no prior tax year's tax overpayment was applied to the current tax year estimated tax, under the child's name and social security number
No federal income tax was withheld from the child's income under backup withholding
The child is required to file a return unless the parent makes this election
The child doesn't file a joint return for the tax year
The parent is the parent qualified to make the election or files a joint return with the child's other parent
For more information, see Form 8814 and Parent's Election To Report Child's Interest and Dividends Must below 10,000 in Publication 929 / Page 9
Ø Must the custodian of a custodial account (UGMA/UTMA) pay income tax for the child with funds from the account?
Out of our scope and is a legal question.
Ø Can capital losses realized in a custodial account be used on the parent’s income tax return?
A child's capital losses are taken into account in figuring the child's unearned income. Capital losses are first applied against capital gains. If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other unearned income. Any difference over $3,000 is carried to the next year.
Form 8814 (Description Below)
Purpose of Form
Use this form if you elect to report your child’s income on your return. If you do, your child will not have to file a return. You can make this election if your child meets all of the following conditions.
The child was under age 19 (or under age 24 if a full-time student) at the end of 2017. “Student” is defined below.
The child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends.
The child’s gross income for 2017 was less than $10,500.
The child is required to file a 2017 return. • The child does not file a joint return for 2017.
There were no estimated tax payments for the child for 2017 (including any overpayment of tax from his or her 2016 return applied to 2017 estimated tax).
There was no federal income tax withheld from the child’s income. You must also qualify.