The good news: Your mother loves your daughter very much and has set up an UGMA/UTMA for her. Your mother also is naming your daughter as beneficiary of her traditional IRA.
The less good news: After the Tax Cuts and Jobs Act of 2017 (TCJA), gifts and bequests of assets that produce income–including traditional IRAs–may be more “taxing” for the beneficiary. In the many pages of the TCJA, there lurks a special reason for “kiddies” to beware. The TCJA makes having unearned income as a ‘kiddie’ more taxing.
First, what is the “Kiddie Tax”?
The “Kiddie Tax” (IRC Section 1(g)) is a specific tax on the unearned income of a child. For this purpose, IRC Section 1(g)(2) applies when either of the following two conditions are true:
The Kiddie Tax does not apply unless all three of the following conditions are true:
|Before TCJA||After TCJA|
"Allocable Parental Amount"
1 The NIIT (Net Investment Income Tax) may also apply if Single/$200,000 and Married Filing Joint/$250,000 limits are exceeded.
2 The NIIT (Net Investment Income Tax) may also apply if a child has income over $200,000.
As you can see, these changes may make shifting income to a child less attractive. Naming a child, or grandchild, as the beneficiary of a traditional IRA may also be less attractive. And while these changes sunset in 2025, it is still important to plan during the intervening years.
Roth IRAs may be even more valuable as a gift to a child, as they are tax-free (assuming the requirements are met).
This is a good time to review your clients’ IRA beneficiary plans, and determine whether they will still meet their goals.
To see other provisions of the TCJA, please see Steve Chmelka’s Tax Cuts and Jobs Act (TCJA) blog.
Should you have any questions regarding the Kiddie Tax, please feel free to contact the Pacific Life Retirement Strategies Group at (800) 722-2333, ext. 3939, or send an email to RSG@PacificLife.com.
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