Mickey Davis (of Houston) pointed out that Title V, Section 501, of the new funding legislation changes the Kiddie Tax (found in Section 1 of the Code).
Quick background: Internal Revenue Code Section 1(g) applied a tax on certain children with unearned income. That was typically called the “kiddie tax.” If the child had been under the age of 19 or was a full-time student under the age of 24 and had at least one living parent and unearned income of more than $2000, and didn’t file a joint return with a spouse, the tax rate applicable to the parent would apply to the child’s unearned income. Unearned income meant income from sources other than from wages and other types of compensation with a couple of other odds and ends thrown in. I have not researched the Congressional history of the section but have always thought it made sense. Most children don’t have capital assets generating income that didn’t come from something the parents did for them, and so it seemed the kiddie tax was a means of rough justice, preventing income shifting from the parents’ higher tax brackets into the lower tax bracket of the child.
The children are taxed at their normal rates for earned income. There are a lot more in the way of specifics and exceptions, but that is a very broad overview of what the law was up until the change brought on by the Tax Cuts and Jobs Act of 2017.
TCJA changed the tax rates applicable by effectively applying the same rates imposed on estates and trusts. Because tax rates on trusts and estates escalate very quickly to the highest rate (they reach the maximum tax bracket at only about $12,500 of income), it seemed to me the change could be, in many cases, a tax increase. Because there is no really good Congressional history for TCJA, I wondered if the installation of Section 199A created a feeling that many otherwise high bracket parents could get dropped into a lower bracket and the kiddie tax might drop in a corresponding way, so TCJA applied estate and trust rates to keep the income tax rates on kiddie tax income high. That’s my speculation and I don’t know if that’s correct or not. Even after the enactment of the new law, the child’s taxable income for earnings was still taxed according to an unmarried taxpayer’s brackets and rates.
The change brought on by TCJA could be found in (then) new paragraph (4) in Section 1(j). The statute just passed by Congress simply repeals that paragraph (4) and, by doing so, the old rules prior to TCJA go back into effect.
The effective date is for taxable years beginning after December 31, 2019. However, as part of the change, there is a section titled “Coordination with Alternative Minimum Tax” which amends Section 55, and the effective date for that change is retroactive back to tax years beginning after December 31, 2017. I have not analyzed the AMT impact, so will leave that to all of you who deal with AMT more regularly.