Friday, November 2, 2018

DEPENDENTS AND THE 2018 TAX RETURN


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









No comments: