A “Taxing” New Situation for Kiddies

April 11, 2018

Learn about recent changes to the Kiddie Tax due to the Tax Cuts and Jobs Act (TCJA) and how now may be a good time to review your clients’ IRA beneficiary plans.

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 child has not reached age 18 by the end of the taxable year.
  • The child has not reached age 24, their earned income is not more than one-half of their support, and they are a full-time student.

 

The Kiddie Tax does not apply unless all three of the following conditions are true:

  • The child is required to file a return for the year.
  • The child has at least one parent alive at the close of the taxable year.
  • The child will not file a joint return for the taxable year.
     
Before TCJA After TCJA

Threshold: $2,100

"Allocable Parental Amount"

Threshold: $2,100
  • Added to parents' income
  • Taxed at parents' marginal tax rate.
  • 3.8% NIIT may apply1
  • Taxed at Trust Tax Rates:
    (0%, 10%, 24%, 35%, 37%)
    (LTCG - 0%, 15%, 20%)
  • 3.8% NIIT may apply2

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.

Picture of Susan Wood

Susan is a Senior Retirement Strategies Group Consultant with more than 25 years of industry experience, including financial planning and wealth management. She has worked in a private planning firm, a joint venture with a trust company, broker/dealer firms, and financial services companies. She has provided continuing education to both financial and legal professionals.

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