“Kiddie Tax” – The SECURE Act
The SECURE Act passed by Congress in December 2019 made important changes to retirement plans, but it also made a change to the ‘Kiddie Tax’.
Before the Tax Cuts and Jobs Act (TCJA), children with unearned income paid no tax on the first $1,100 of unearned income, and the next $1,100 was taxed at the child’s tax rate. Earnings over $2,200 were taxed at the parents’ rate. TCJA changed that rate to the trust income tax rates, which could be much higher than the parent’s rate and created a substantial penalty on a child’s unearned income.
The change created some unintended, and surprising consequences. As noted by the Wall Street Journal*, in many cases survivors’ benefits paid to children of lost active-duty service members were taxed at rates substantially higher than their parents.
The SECURE Act repeals the TCJA change in the Kiddie Tax and is effective for 2020 and beyond. The SECURE Act includes the option to apply the rules to 2019 tax returns and amend 2018.
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* Please note, to read the Wall Street Journal a subscription may be required.