kiddie tax rules for 2018

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Taxpro336
Posts: 1
Joined: Sun Feb 11, 2018 8:40 am

kiddie tax rules for 2018

Post by Taxpro336 » Sun Feb 11, 2018 8:58 am

Need help in determining how the Kiddie tax rules will actually apply for 2018.

For example, grandchild age 15 with no earned income and the following investment income for 2018:

$4000 in total dividends......of which $2000 are qualified dividends

$2000 in long term capital gains.

1) How will the Federal Income tax be computed?

2) What will be the Federal Income tax if there are Foreign Income tax of $300 paid by one investment mutual fund?

Spirit Rider
Posts: 8568
Joined: Fri Mar 02, 2007 2:39 pm

Re: kiddie tax rules for 2018

Post by Spirit Rider » Sun Feb 11, 2018 4:35 pm

1) The amount after the dependents $1,050 standard deduction and the amount $1,050 taxed at the dependent's rate was changed from parent's rate to trust tax rates

$2,000: ordinary dividends subject to ordinary income tax rates.
$4,000: qualified dividends and capital gains subject to capital gains tax rates

$1,050 $ 0, standard deduction
$ 950 $95, dependent's 10% rate, leaving $100
$2,700 $ 0, $100 dependent and $2600 trust 0% capital gains rate*, leaving $1,300
$1,300 $195, trust 15% capital gains rate*.
Total $290

* Applicable trust rates
$0 - $2,550 10% ordinary income tax rate, 0% capital gains tax rate
$2,550 - $2,600 24% ordinary income tax rate, 0% capital gains tax rate**
$2,600 - $9150 24% ordinary income tax rate, 15% capital gains tax rate

** The trust 0% capital gains tax rate goes to $2,600 and the 15% rate goes to $12,700 when the respective ordinary income tax brackets go to $2,550 and $12,500. These same anomalies also exist in the personal capital gains brackets.

2) I do not know much more about the foreign tax credit other than I enter my forms and the tax software enters it. If it is applicable in this case it could wipe out up to $300 in taxes

P.S. Try to get the amount subject to ordinary income taxes down. When they get earned income as teenagers >= $700, that deduction drops to $350.

MarkNYC
Posts: 1362
Joined: Mon May 05, 2008 7:58 pm

Re: kiddie tax rules for 2018

Post by MarkNYC » Thu Feb 15, 2018 2:24 pm

Spirit Rider wrote:
Sun Feb 11, 2018 4:35 pm
1) The amount after the dependents $1,050 standard deduction and the amount $1,050 taxed at the dependent's rate was changed from parent's rate to trust tax rates

$2,000: ordinary dividends subject to ordinary income tax rates.
$4,000: qualified dividends and capital gains subject to capital gains tax rates

$1,050 $ 0, standard deduction
$ 950 $95, dependent's 10% rate, leaving $100
$2,700 $ 0, $100 dependent and $2600 trust 0% capital gains rate*, leaving $1,300
$1,300 $195, trust 15% capital gains rate*.
Total $290
That calculation method is not correct. Under the Kiddie Tax rules, if the child has unearned income that includes both (1) ordinary income and (2) Qualified Dividend Income (QDI) and/or LT capital gains, then a portion of the QDI/LT gain amount must be allocated to the amount taxed at the child's rate.

In the above example the amount that must be allocated to the child's rate is $4,000/$6,000 x 2100 = $1,400. So for the first $2,100, the exemption takes up the first $1.050, and the next $1.050 has zero tax since it is all QDI/LT gain. The remaining $3,900 of taxable income taxed at the trust rate contains $2,600 QDI/LT gain ( $4,000 minus $1,400) and $1,300 of ordinary income.

Form 8615 instructions provides a worksheet that shows the required "allocation" calculation, which I don't expect will change with the new tax law.

47Percent
Posts: 321
Joined: Tue Oct 29, 2013 9:59 pm

Re: kiddie tax rules for 2018

Post by 47Percent » Wed Jul 11, 2018 8:28 pm

Spirit Rider wrote:
Sun Feb 11, 2018 4:35 pm

$1,050 $ 0, standard deduction
$ 950 $95, dependent's 10% rate, leaving $100
$2,700 $ 0, $100 dependent and $2600 trust 0% capital gains rate*, leaving $1,300
One thing I never quite understood is why you have to pay the 10% dependent's rate even if you have ONLY qualified dividends and LTCG.
Shouldn't everything be subsumed by the 0% LTCG allowance if you have only some minimal -- say $4000 total of those?

I thought it was a quirk of combining it with the parent's return all these years. Does it work out the same way even if you file a separate return?

Spirit Rider
Posts: 8568
Joined: Fri Mar 02, 2007 2:39 pm

Re: kiddie tax rules for 2018

Post by Spirit Rider » Wed Jul 11, 2018 9:03 pm

That example had $2000 in ordinary dividends. If all you had were qualified dividends and LTCG, they would be taxed at the relevant capital gains tax rate.

There is no difference in taxation regardless of whether filed with the parent's or a child's return. However, you can only file on the parent's return if there there are no capital gains. You can only do so if there are only interest, dividends and capital gains distributions.

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