New tax rules raise the cost for most kids — but not all

Instead of taxing a child's income as if it were the parents', a child's income is now taxed using the trust tax brackets.

May 20, 2019 @ 1:23 pm

By Tim Steffen

When word about changes to the kiddie tax rules started getting around, the response was mostly confusion. Were parents supposed to be happy about these changes, or would the changes increase taxes and hamstring investment strategies?

The answer, as is so often the case with taxes, is mixed. There's no question that for many these changes led to tax increases, but it wasn't universal. And in some respects, tax returns for kids became easier to prepare.

The new kiddie tax

So what changed with the kiddie tax? It wasn't the type of taxpayer subject to the tax, as it still generally applies to any child under the age of 18, or under age 24 if they're a full-time student.

The type of income subject to the kiddie tax didn't change, either. It still applies to any unearned income received by those taxpayers, which basically means anything other than wages. For most kids, this simply means investment income. However, distributions from an inherited IRA, Social Security benefits due to a deceased parent, and even some college scholarships are subject to the kiddie tax.

(More: Don't confuse old tax rules with new ones when selling a home)

What did change were the tax rates that apply to this income. Prior to the changes, a child's income was taxed as if it were the parents'. If the parents were in a high marginal tax bracket, so were their offspring.

Now a child's income is taxed using the trust tax brackets. While most taxpayers don't know the details of these brackets, they know this — trust tax rates get real, high real fast.

For example, the top tax rate on ordinary income for a trust is the same 37% assessed on individuals. A married couple reaches that level this year once their income exceeds $612,350. For a trust — and now for kids — that rate kicks in at just $12,750.

The child can still claim a standard deduction of $1,100 in 2019, and another $1,100 is taxed using the single taxpayer rates (typically 10%), but above that things get interesting.

(More: Do you know how to calculate after-tax returns?)

Winners and losers

Given those condensed brackets, one might think that kids just got a tax increase. In many cases that's true. For example, parents with income between $168,400 and $321,450 would be in the 24% bracket. Their child, however, reaches the top of 24% rate at $9,300 of income, and then jumps right up to 35%.

It's even more noticeable with capital gains. Parents won't reach the 20% capital gains rate until their income exceeds $488,850. Kids hit that level at just $12,950. It won't be unusual to see kids subject to a higher capital gain tax rate than their parents.

But what about kids of high-earning parents? If the parent is already in a top bracket, the child actually gets a tax cut, as they now get the benefit of the lower brackets on up to $12,750 of ordinary income. Taxing that income to a parent in the top bracket would cost about $4,700, but now the child would only owe about $3,000 – a $1,700 tax cut.

Filing a child's tax return should be easier now, too. Since their tax is no longer based on their parents' income, kids' tax returns can be separate from the parents'. No longer do kids have to extend just because their parents did.

Also, each child is on his or her own now. Under the old rules, all the kids was combined with the parents, and the total kiddie tax was prorated among them. Now, a child with less income won't be penalized by having a sibling with more income.

So yes, there are some small silver linings to the new kiddie tax. However, it's still likely that many kids will end up paying more tax under the new system, and advisers need to keep this in mind when managing their portfolios.

(More: International investments bring a unique twist foreign taxes)

Tim Steffen is director of advanced planning for Baird. Follow him on Twitter @TimSteffenCPA.


What do you think?

View comments

Upcoming event

Jul 09


Boston Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print