Tax law: Why changes to the kiddie tax are a ‘big deal’ for advisers

Investment News has an article on why the kiddie tax changes in the TCJA are a big deal for advisors.  The article begins as follows:

The new federal tax law made changes to the so-called “kiddie tax” that could impact how some advisers handle their clients’ financial plans.

While experts say lawmakers largely simplified the kiddie tax, the changes may change how some clients finance a child’s college education and, in rare circumstances, cause some low- to middle-income families to pay more in tax.

“This is a big deal,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “I think it creates all sorts of traps for the unwary.”

The kiddie tax is a tax on a child’s net unearned income — essentially, income excluding wages and business income. It primarily affects income from investment assets — such as interest and dividends from mutual funds, or capital gains from the sale of a stock — but could also affect things like income from inherited retirement plans, experts said.

The tax is meant to prevent parents and grandparents in high-income tax brackets from shifting investment assets to their children and therefore get a lower tax rate. It affects children under age 19, and full-time students under 24.

More than 215,000 tax returns were subject to the kiddie tax in 2011, generating $621.2 million in revenue for the federal government, according to the most recently available analysis from the Internal Revenue Service.

See full article by clicking here.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.

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