Find Your Specialist


Contact Us

    Go Back

    Tax on Investment Income of Children May Increase Under New Kiddie Rules

    Only one change was made in the “kiddie tax” under the Tax Cuts and Jobs Act, but it could be significant. Children will no longer be taxed on unearned income at the parents’ tax rate (the “kiddie tax” rule). Instead, the estate and trust income tax rates will apply.

    This may sound simple and not so bad; however, it could result in a higher tax on children’s income for some parents.

    Like many topics this year, taxpayers should get tax advice that is tailored to their unique situation before making gifts to children or grandchildren.

    Kiddie Tax Basics

    The kiddie tax is designed to impose the parents’ tax rate on the net unearned income of children. The purpose is to prevent parents from income-shifting to family members who are in a lower tax bracket.

    Unearned income includes taxable interest, ordinary dividends, capital gains, rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony and income received as the beneficiary of a trust.

    The kiddie tax applies in the following circumstances:

    1. The child is under age 19 by the close of the tax year or is a full-time student age 19 to 23;
    2. The child’s unearned income exceeds an inflation-adjusted amount (set at $2,100 for 2018); and
    3. The child does not file a joint return.

    For a child age 18, or a child age 19 to 23 who is a full-time student, the kiddie tax rules apply only if the child’s earned income does not exceed one-half of the child’s support.

    The kiddie tax is figured on Form 8615.pdfTax for Certain Children Who Have Unearned Income. This form is attached to the child’s tax return. A child required to file Form 8615 also may be subject to the 3.8% Net Investment Income Tax (NIIT) and the alternative minimum tax (AMT).

     If the child’s only income is interest and dividend income, including capital gain distributions, and totals less than $10,500, the parents may be able to elect to include that income on the parents’ return rather than file a return for the child.

    Why the Trust Rates Could be Higher

    Beginning in 2018, children will pay tax on their unearned income using the same tax tables as trusts (shown below) instead of at their parents’ regular income tax rates (also shown below). This change simplifies computation of the tax but could result in the children paying higher taxes than under the old rules.

    Income Tax Rates for Estates and Trusts
    Estates and Trusts Income Tax Rates
    $0-$2,550 10%
    $2,551-$9,150 24%
    $9,151-$12,500 35%
    Over $12,500 37%


    Income Levels and Filing Status
    Tax Rate Single Married-Joint
    10% $0-$9,525 $0-$19,050
    12% $9,526-$38,700 $19,051-$77,400
    22% $38,701-$82,500 $77,401-$165,000
    24% $82,501-$157,500 $165,001-$315,000
    32% $157,501-$200,000 $315,001-$400,000
    35% $200,001-$500,000 $400,001-$600,000
    38.5% $500,000+ $600,000+


    Why is the tax higher? Because the top 37% rate kicks in at $12,500 for estates and trusts and not until $600,000 for married couples.

    For capital gains, the 20% trust capital gains rate kicks in when taxable income reaches $12,700. For married couples, the 20% capital gains rate does not apply until taxable income exceeds $479,000.

    In short, higher tax rates are imposed on trusts at much lower income levels than for individuals.

    Whether this change results in an actual increase in tax on children’s unearned income will depend on how much income is subject to the kiddie tax and in which tax bracket the parents are. The child would only pay higher taxes if the parents are in a lower bracket, which is not likely given the usual taxpayers who gift unearned income to their children.

    Still, because of the potential for higher taxes, parents and grandparents should get tax advice before making gifts to children and grandchildren which could result in a substantial amount of unearned income for the child.

    Related Articles

    • 01.25.2023

      A New Year Means New Privacy Laws

      Ever since the General Data Protection Regulation (GDPR) came into effect in May 2018, US state privacy laws have been passed in Virginia, Colorado, Connecticut, Utah and, most pressing of them all, California. The California Privacy Rights Act (CPRA) went…

      Continue Reading
    • 01.19.2023

      The New Rules Under Section 174

      Internal Revenue Code Section 174 has long been used by taxpayers to deduct certain expenses related to research and experimentation (R&E) in the current year.  The code section was originally enacted in 1954 to eliminate uncertainty in the tax accounting…

      Continue Reading
    • 12.20.2022

      IRS Customer Service May Improve in 2023

      With 4,000 new customer service representatives and plans to hire 700 new Taxpayer Assistance Center (TAC) employees, taxpayers soon may get relief from endless hold times, no in-person help and unresolved problems.

      Continue Reading
    • 12.12.2022

      Reduce Taxable Income with IRA Distributions Transfers

      IRA owners who are age 70½ or over can transfer up to $100,000 per year to charity to reduce their taxable income. These transfers, known as qualified charitable distributions or QCDs, offer end-of-the year tax savings and can count toward required minimum distributions (RMDs) that taxpayers who are age 72 must make each year. Think of it as a tax-free charitable rollover of IRA funds.

      Continue Reading
    • 12.02.2022

      UK R&D Tax Reliefs – Where Are We Now?

      In the November 2022 Autumn Statement, the Chancellor announced significant changes to the current Research and Development (R&D) tax reliefs. The key announcements were a change to the applicable rate of the Research and Development Expenditure Credit (RDEC) and a…

      Continue Reading
    • 12.01.2022

      1099s Required for 2022 Tax Year

      Taxpayers earning income from selling goods or providing services may receive a Form 1099-K, Payment Card and Third-Party Network Transactions, for the first time in early 2023, when the 2022 forms are due. The requirement to file Forms 1099 have…

      Continue Reading
    • 11.28.2022

      IRS Uncovers $3.1 Billion in COVID Fraud

      The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than…

      Continue Reading
    • 10.25.2022

      IRS Inflation Reduction Act Increases Funds

      The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles…

      Continue Reading

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled