Return Federal ‘Kiddie Tax’ Rules to 2019 to Simplify Process

I would wish for a return to the rules that existed for 2018 and 2019 allowing use of the fiduciary income tax rates in calculating the “kiddie tax,” whereby the unearned income of dependent children is subjected to tax at their parents’ marginal rate.

This tax has been in the law since its enactment as part of the Tax Reform Act of 1986. Tax practitioners often use Form 8814, known as the Parents’ Election to Report Child’s Interest and Dividends, to avoid having to file income tax returns for dependent children.

To use this form, the child’s only income can be from interest and dividends, including capital gain distributions. Whenever the child has executed a sale resulting in Form 1099-B proceeds being reported, Form 8814 can’t be used.

The kiddie tax calculations can get unwieldy, requiring the calculation of the parents’ taxable income, along with cross-inclusion of sibling investment income for siblings also subject to the kiddie tax.

This can result in extension requests needing to be filed for affected children due to the parents being on extension—not to mention the administrative headaches such as executing engagement letters and creating new accounts for the children for which income tax returns become necessary to be filed.

For 2018 and 2019, the Tax Cuts and Jobs Act permitted calculation of the kiddie tax using the income tax brackets for estates and trusts. That provision was eliminated by the Further Consolidated Appropriations Act enacted at the end of 2019.

Granted the tax can be somewhat higher using the fiduciary income tax rates due to the compressed tax brackets. However, the 0% rate on long-term capital gains and qualified dividends was often applicable, reducing the impact.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Neil Becourtney, CPA, is a tax director for Smolin, Lupin & Co., an accounting firm with offices in New Jersey and Florida.

We’d love to hear your smart, original take: Write for us.