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
|
10%
|
$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?
TTFN
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