As the 2017 tax act was making its way through Congress, most of us thought that Congress had a goal of simplifying the kiddie tax. Children with unearned income above a certain threshold would no longer be taxed at their parents’ marginal tax rates. Further, each child’s tax would not be dependent upon his siblings and half-siblings.
To be sure, there are certain aspects of the kiddie tax that have made things much easier for parents. For instance, in divorce situations, a parent no longer need worry about obtaining the tax information of an uncooperative “other parent.” However, the actual calculation of the new kiddie tax is anything but “simple.” Reading the Code on the new kiddie tax is like reading a foreign language, even for those of us who are used to reading the Internal Revenue Code.
I wrote a piece for the Daily Tax Report detailing the calculation of the kiddie tax. A more comprehensive version will be published in the upcoming July/August edition of the Bloomberg BNA Estates, Gifts and Trusts Journal. Therefore, I will not bore you with any sort of Codal analysis of the kiddie tax or provide any complicated calculations. Most practitioners will simply input the data into their tax preparation software and will get the calculation of the kiddie tax for each individual child.
However, despite the fact that most practitioners will not need to get into the weeds of the calculation, they should have a basic understanding of how it works. Before I started writing the Daily Tax Report/EGTJ article and updating our products, I found three online articles purporting to give calculations of “simple” kiddie tax scenarios. According to the Bloomberg Tax Income Tax Planner©, all three got the calculation wrong. It was at that point that I decided to dig deeper.
As it turned out, these articles seemed to rely on the explanation of the kiddie tax as espoused by the Conference Report (H. Rep. 115-466) to accompany H.R. 1. According the Conference Report, “The provision simplifies the ‘kiddie tax’ by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child.” Unfortunately, that’s not exactly what the 2017 tax act does.
The 2017 tax act requires each child subject to the kiddie tax to construct his or her own tax table based upon the child’s net unearned income, earned taxable income, and the maximum amounts of income subject to rates provided in the estate and trusts tax table. The tax table is constructed by using the tax table applicable to unmarried taxpayers, but is modified with the child’s “earned taxable income” and the minimum and maximum dollar amounts – not rates – from the estates and trusts income tax table. The term “earned taxable income” is a new term of art. One of the interesting aspects of earned taxable income is that it is possible for a child to have earned taxable income without even having earned any income from his or her labor or services (see Example 3 in the Daily Tax Report article).
Again, if you would like to see examples of the calculations, please see the article in the Daily Tax Report. But, practitioners should know that the new kiddie tax is not simply calculated by subjecting the unearned income of a child to the tax table for estates and trusts contained in §1(j)(2)(C). It is far more complicated than that. As I mentioned in the article, it will be interesting (and perhaps entertaining) to see how the IRS attempts to explain this new “simplified” kiddie tax in the 2018 version of Form 8615, Tax for Certain Children Who Have Unearned Income, and the accompanying Instructions and Worksheets. Something tells me the IRS agents tasked with explaining the new kiddie tax and providing worksheets for taxpayers to figure it out with a pencil and paper will not find Congress’ sense of humor to be that funny.
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