Friday, November 2, 2018


Here are some things that taxpayers with dependent children need to know when planning for and preparing their 2018 federal income tax returns.

* For 2018 your dependent children can make up to $12,000 in “earned income” – W-2 wages and net earnings from self-employment - without having to pay any federal income tax.  This is based on the new Standard Deduction amount for a Single individual.  They will still need to file a federal tax return to get a refund of any federal income tax return or if they had “unearned income” such as interest, dividends and capital gains.

* The “Kiddie Tax” is no longer dependent on the income of the parents.  The taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.

The 2018 Tax Rate Schedule for Trusts and Estates are -

Taxable Income of:
Tax Due is:
$0 - $2,550
$2,551 - $9,150
$255 plus 24% of amount over $2,550
$9,151 - $12,500
$1,839 plus 35% of amount over $9,150
$12,501 +
$3,011.50 plus 37% of amount over $12,500

The lower tax rates for qualified dividends and capital gains for Trusts and Estates apply as follows:

 0% =  $        0 - $  2,600
15% = $  2,601 - $12,700
20% = $12,701 and higher

Here is a basic example A dependent child has no earned income and $7,000 of interest and short-term capital gains – so none of the income is taxed at the special lower rate.  The Standard Deduction allowed is $1,050, so net taxable income is $5,950.  The amount of income subject to the Kiddie Tax is $4,900 ($7,000 less $2,100 threshold).  $2,550 is taxed at 10% = $255.  $2,350 is taxed at 24% = $564.  The remaining $1,050 is taxed at 10% under the table for a Single taxpayer = $105.  The total tax on $5,950 of net taxable income is $924 – an effective rate of 15.53%.  Under the “old” rules, with the income taxed at the parents’ rate, the Kiddie Tax would probably have been higher. 

* There has been no change to the rules for determining if a person can be claimed as a dependent on your 2018 Form 1040.

* While there no longer exists a Personal Exemption deduction amount, the amount of gross income used in determining if a person can be claimed as a dependent as a “qualifying relative” is what this amount would have been if it still existed – which is $4,150.

* There has also been no change to the rules for the Child and Dependent Care Credit.

Any questions?


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