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Original Kiddie Tax Computation Method Restored!

Kiddie tax computation method which was changed from the tax year 2017 is again restored to the original method of computation vide signing of Appropriations Act of 2020 by President Trump on December 20, 2019, The original kiddie tax computation taxes the child’s net unearned income at the parents’ tax rate if it’s higher than the child’s tax rate.

Can I amend Earlier Return?

Yes, you can choose whichever method provides the lowest tax for 2018 and 2019 and can amend the 2018 return if it provides a better outcome. Have you tried Kiddie Tax Calculator for 2018 & 2019 ?

What is unearned income?

Unearned income generally includes investment income such as taxable interest, dividends (including capital gain distributions), and capital gains, as well as rents, royalties, pension income, survivor benefits, the taxable part of Social Security benefits, taxable scholarship and fellowship grants not reported on Form W-2, and other income types.

Who is a dependent child?

A child is defined as a dependent child if

  1. he/she is under the age of 19 during the tax year or
  2. he/she is under 24 and is a full-time student.
  3. he/she is living with you for more than half of the year (unless he/she is away due to a temporary absence that includes living away from home while attending school), and
  4. He/she is not self-supporting.

How a Child’s Income Is Taxed?

There can be four different taxable situations in case of a child. The following table will explain :

Types of IncomeWhether to file a tax return?
Only wages If more than $ 12,200 for year 2019, the child need to file a tax return. If less than the standard deduction, no return required to be filed.
Only self-employment incom If he/she has more than $433 of self-employment net income,he/she must file a return, even if the total income is less than the standard deduction
Only have investment income The child can claim the standard deduction for 2019 of $1,100, but for the kiddie tax computation, any investment income in excess of $2,200 (the special allowance previously mentioned in this article) will be taxed either at fiduciary rates or at their parents’ marginal tax rate
Earned Income and Investment Income Since child earns his/her income as well as having investment income, he/she can claim the standard deduction is the greater of $1,100 or the child’s earned income plus $350, but it should not exceed the $12,200 standard deduction for a single individual. There is an option for choosing TCJA method for the tax year 2018 and 2019.If the TCJA method isn’t used, the child’s tax will be the greater of the tax on all of the child’s income or the sum of the tax on the child’s earned income plus the child’s share of the allocable parent tax.

Can Parent Include Income of Kids ?

Yes, only if the child has any kind of earned or unearned income other than the interest and dividend income (including capital gain distributions) and aggregate of such income is less than $11,000. Then, instead of the child filing a return of his/her own, a parent can include those income in his/her return.

Please read Kiddie Tax Simplified!

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