Many areas of the U.S. individual income tax were changed for tax years 2018 through 2025 when P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), was enacted in late 2017. One of those areas was the "kiddie tax," the tax imposed on certain children with unearned income. Congressional efforts to amend the Internal Revenue Code garnered substantial press coverage from late 2017 through early 2018 given the significant and far-ranging changes made to the tax law as a whole. Major changes were made to the kiddie tax as well, yet press coverage of these changes has been scant.
Since the TCJA became law, a few articles have reported that the kiddie tax is calculated simply by reference to the estate and trust tax rate table. This synopsis of law changes may have been inspired by page 9 of the congressional conference committee report for P.L. 115-97, which stated, "taxable income attributable to earned income is taxed according to an unmarried taxpayer's brackets and rates. Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates" (H.R. Conf. Rep't No. 115-466, 115th Cong., 1st Sess. 197 (Dec. 15, 2017), available at tinyurl.com/y9ujtmcz). Yet this description of how the kiddie tax is computed is not entirely accurate. The purpose of this article is to provide a robust discussion of the changes to the law to help practitioners better understand how the law has changed and to assist them in calculating estimated quarterly tax payments for children subject to the tax.
HOW THE TCJA SIMPLIFIED THE KIDDIE TAX
The AICPA advocated for a simpler kiddie tax as Congress crafted the TCJA. This advocacy was at least partially successful, since some of the complexities in the old kiddie tax are no longer present in the new law. The previous law required the kiddie tax to be the greater of two tax calculations. The first calculation was the tax on the child's taxable income as if the kiddie tax did not exist. The second calculation was the sum of the tax on the child's net unearned income assessed at a parent's marginal tax rate plus the tax computed on the remaining taxable income at the child's tax rates. This second calculation introduced complexity because the child's taxable income had to be bifurcated to compute tax using both marginal tax rates--the parent's and the child's.
The old law was also complex when the child's parents were divorced or married filing separately, because the tax preparer had to determine which parent's marginal tax rate should be used. Another complexity stemmed from computing the child's allocable share of the parental tax when the child had siblings who were also subject to the kiddie tax.
Finally, under the old law, it was difficult to calculate the kiddie tax when the parent(s) had a different tax year than the child. Thanks to changes made by the TCJA, all of the foregoing complexities vanish for 2018 through 2025, since none of these provisions apply to the calculation of the kiddie tax during this time frame. The conference committee report for the TCJA confirms Congress's intent was to simplify the calculation of the kiddie tax so that a child's tax is "unaffected by the tax situation of the child's parent or the unearned income of any siblings" (H.R. Conf. Rep't No. 115-466, 115th Cong., 1st Sess. 197 (Dec. 15, 2017)).
ONE CONVENIENCE LOST
Unfortunately, an administrative convenience in the old kiddie tax did not find its way into the new rules. Under the old law, parents could elect to report a child's unearned income on their income tax return using Form 8814, Parents' Election to Report Child's Interest and Dividends. Parents whose children had only interest and dividends subject to the kiddie tax could avoid the added cost and hassle of filing income tax returns for the children. It appears this convenience does not exist in the new law since there is no corollary provision, nor does the new law expressly reference the election provision in the old law. While the removal of this administrative convenience will be irksome for some taxpayers, it is a logical change to the law since the kiddie tax is no longer calculated at the parents' rates.