Changes to “Kiddie Tax” Following the Tax Cuts and Jobs Act of 2017

The “Kiddie Tax” has been in place since Congress passed the Tax Reform Act of 1986. The Kiddie Tax serves to prevent parents from attempting to reduce their tax liability by shifting income to their children. The Kiddie Tax applies to the investment income of children under the age of 19 or, if full-time students, under the age of 24. In prior years, children were taxed at their parents’ highest marginal tax rate, which could be as high as 39.6%.

The Tax Cuts and Jobs Act of 2017 made changes to the Kiddie Tax. For tax years beginning in 2018, the portion of a child’s investment income that exceeds $2,100 is taxed at the brackets and rates applicable to trusts and estates. This means that the first $2,550 of a child’s investment income is taxed at 10%, the next $6,600 is taxed at 24%, and the next $3,350 is taxed at 35%. Anything above $12,500 of a child’s investment income is taxed at 37%.

While the new law demonstrates Congress’ increasingly hostile approach toward the concept of shifting investments to children, there are still opportunities for reducing gift and income taxes through other transfers to children that do not implicate the Kiddie Tax. Gifting property to children that generates tax-free or tax-deferred income, such as municipal bonds or deferred annuities, is one way to prevent the application of the Kiddie Tax. Another option is to implement a 529 savings plan for your children which is tax-free if the funds are used for educational purposes by a child.

Please contact Leech Tishman’s Estates & Trusts Group for more information and advice on the tax consequences that follow gifts to children.

Leech Tishman’s Estates & Trusts Practice Group is engaged in the development of practical, effective estate planning and business succession planning for individuals, families, businesses, non-profit organizations, and private foundations.

If you have any questions regarding estate & gift tax matters, please contact David J. DelFiandra, a Partner in Leech Tishman’s Pittsburgh, PA office. Dave can be reached at 412.261.1600 or ddelfiandra@leechtishman.com. 

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, internal investigations, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Lakewood Ranch, FL, Los Angeles, New York and Wilmington, DE.