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How the Secure Act Changes Kiddie Tax Rules

The Secure Act is known for changing rules for tax advantaged retirement accounts.  One less well known provision of the act undid the Tax Cuts and Jobs Act’s Kiddie Tax changes.  The change is retroactive for all years affected by the TCJA: 2018 and 2019.  That means those returns can be amended to take advantage of the adjustment.

So what does the change mean?

The Kiddie Tax was intended to prevent parents from using kids to get unfair tax advantages — children are taxed at far lower rates than working parents are. The Kiddie Tax aimed to stop this by forcing children to pay their parents’ tax rate on income above certain levels, and it has been around since 1986.  However, it went through major changes in late 2017 as part of the broader TCJA tax reform package.

The TCJA changed the rules so that, rather than using parents’ tax rates, taxpayer was forced to use the rates for trusts and estates. Those rates run from 10% to 37%, just like tax brackets for individuals and couples but are greatly compressed.  That means that income is taxed at a higher rate much more quickly.  The top 37% bracket kicked in at just $12,750 for the 2019 tax year under the estate tax regime. For a married couple, the 37% tax bracket doesn’t kick in until over $600,000. It meant that even low-income families could be charged high tax rates.

The Secure Act switches the tax brackets used to compute the Kiddie tax back to what it was before the TCJA.  That means that the parents’ tax bracket is used again.

The other provisions of the Kiddie tax have remain unchanged.  The amount of income subject to the Kiddie tax is still calculated using the threshold deduction.  For more about the Kiddie Tax in general and how the amount subject to tax is calculated refer to this previous article.

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