The “kiddie tax” generally applies to most unearned income of children under age 19 and of full-time students under age 24 (unless the student provides more than half of their own support from earned income). Unearned income for purposes of the kiddie tax means income other than wages, salaries, professional fees and other compensation for professional services.
Before 2018, unearned income subject to the kiddie tax was generally taxed at the parents’ tax rate. The Tax Cuts and Jobs Act (TCJA) makes the kiddie tax harsher by revising the tax rate structure.
From 2018 to 2025, the parents’ tax rate will not matter. Instead, a child’s unearned income beyond $2,100 (in 2018) will be taxed according to the tax brackets used for trusts and estates. For 2018, once taxable income exceeds $12,500, a child’s unearned income will be taxed at the highest marginal rate of 37%.
In contrast, for a married couple filing jointly, the highest marginal rate of 37% does not kick in until their 2018 taxable income tops $600,000.
In other words, under the TCJA, a child’s unearned income, in some cases, can be taxed at a higher rate than their parents’ income beginning in 2018.
However, high-income taxpayers who are already in the highest 37% tax bracket, could potentially benefit by paying lower rates of 10% to 24% on additional income above the first $2,100 of up to $11,250 per child. In addition, if the parents’ tax rate for capital gains is already the 20% maximum, they can save on the first $2,600 of capital gains above the $2,100 income limit as they qualify for a 0% rate, and the 15% rate applying up to $12,700 per child.