Kiddie Tax Reverts to More Favorable Rate

The SECURE Act, signed into law on December 20, 2019, had an impact on a wide range of taxpayers – from retirees all the way down to children.

The Act repealed the increased kiddie tax rate imposed under the Tax Cuts and Jobs Act of 2017 (TCJA). Under the TCJA, a child’s unearned income was taxed at the much higher trust and estate tax rate. The new legislation brings back pre-TCJA rules, which tax this income at the parent’s tax rate.

Effective for 2020 and beyond, the Act also gives taxpayers the option to retroactively apply this lesser rate to their children’s 2018 and 2019 tax returns.

Who is subject to the kiddie tax?

The kiddie tax applies to a child’s unearned income above $2,100 from dividends, rent, capital gain, interest, S-corp. distributions and any other type of income that is not compensation for work, only if they are:

  • under the age of 18 with at least one living parent at the end of the year
  • required to file a tax return but do not file it jointly
  • age 18 (or a full-time student under the age of 24) at the end of the year and did not have earned income that was more than half of their support.