Our previous three blogs have focused on changes to retirement accounts resulting from the new SECURE Act; however, the changes were not limited to retirement accounts. Another change resulting from the SECURE Act is a reduction in the “Kiddie Tax” rate.
The “Kiddie Tax” is a tax imposed on individuals under 17 years of age whose investment and unearned income is higher than an annually determined threshold. Prior to 2018, if a child’s income exceeded the threshold, the income was taxed at the rate of the child’s guardian. Starting in 2018, the Kiddie Tax rate was based on the higher tax rates for estates and trusts.
While it may not be apparent at first glance, the difference in the rates can be drastic. For instance, in 2018, the tax rate for a married couple filing jointly with taxable income of $165,000 was 24% while Estates and Trusts with only $2,550 in taxable income were also taxed at 24%. In fact, a married couple filing jointly reached the 37% tax rate at $600,000 in taxable income while Estates and Trusts reached this rate at $12,500.
In addition to the highest tax rates being applied at significantly lower taxable incomes, the taxable portion of college grants, scholarships and fellowships were taxed at the Estates and Trusts rates.
The SECURE Act repeals the change to the Kiddie Tax and reverts to the rules that were in effect prior to 2018 beginning after December 31, 2019. As a result, if a child’s income exceeds the threshold, the income will once again be taxed at the rate of the child’s guardian.
Read our blog next week to learn about the effect of the law on small business. If you wish to schedule a meeting to discuss your estate planning needs, call us at 678-781-9230.
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This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney client relationship between you and Grissom Law, LLC.