If your children have any unearned income, then your family may be affected by the so-called “kiddie tax.” How does the Tax Cuts and Jobs Act of 2017 affect you and your children? As you’ll see, tax planning can help you ensure that the impact on your family is minimal.
First, it’s important to understand what unearned income is. Unearned income is defined as income which is not received through working at a trade or for a business. Some common examples of unearned income include stock dividends, interest, and capital gains. Only unearned income qualifies for the kiddie tax.
The recent changes to the tax code mean that children who qualify for the kiddie tax will now see their unearned income taxed at the same rates that currently affect trusts and estates. This means that your child could be taxed at a rate of anywhere from 20 to 37 percent.
If your child’s unearned income is close to or less than the threshold—$2,100 for the year 2018 and $2,200 for 2019—then you won’t have to worry. If the kiddie tax is significantly affecting your child’s unearned income, you may want to adopt a new strategy, such as changing your child’s investment mix or employing them so that the kiddie tax no longer affects them.
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