Tax Tip of the Month
4 Ways to Cut Down "Kiddie Tax":
The recent Tax Cuts and Jobs Act (TCJA) implemented tougher constraints into the "kiddie tax" rules. However, by planning effectively in advance, parents can avoid potentially dreadful tax consequences.
Beginning in the 2018 Tax Year, the calculation used to tax unearned income above an annual threshold received by a dependent child under age 19 (or a full-time student under age 24) is based on the federal income tax rates for estates and trusts.
The resulting kiddie tax is generally greater than it would be under the old rules that said unearned income should be taxed at the top tax rate of the child's parents. Now, the estates and trusts tax brackets are more compressed than the individual brackets for parents, and higher rates kick in sooner.
Great news for you: You may be able to cut the kiddie tax down to size if you apply one or more of the following strategies:
1. Minimize transfers. Don't go overboard putting money in your child's name. No kiddie tax is due if the child's 2018 investment income stays below $2,100. This kiddie tax threshold stays the same as it was in 2017.
2. Monitor the situation. As the year progresses, you may avoid transactions that would trigger the kiddie tax. For instance, you might defer short-term gains on sales of securities.
3. Invest tax-wisely. Consider investments in growth stocks that produce little or no dividend income, or tax-free municipal bonds or bond funds. Time your investments so that any unearned income is only collected when it falls below the $2,100 threshold.
4. Use other methods of transferring income. One possibility is to have your teenager work for your company during the summer. Because this income is "earned," it doesn't count towards the kiddie tax calculation.
Please feel free to give us a call at 559-226-2209 your convenience if you have any questions or concerns about how the kiddie tax may affect your tax situation in the coming years.
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Any financial or tax information contained in this article is taken from a general view and should not be acted upon in your specific circumstances without further details and analysis of the situation or professional assistance from a CPA or tax return preparer.
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