4 ways to cut down kiddie tax

The Tax Cuts and Jobs Act (TCJA) put some sharper teeth into the "kiddie tax" rules. But with some astute planning, parents can avoid dire tax consequences.

Starting this year, the calculation used to tax unearned income above an annual threshold received by a dependent child under age 19 (or a full-time student under age 24) is based on the federal income tax rates for estates and trusts.

The resulting kiddie tax is generally greater than it would be under the old rules that said unearned income should be taxed at the top tax rate of the child's parents. Now, the estates and trusts tax brackets are more compressed than the individual brackets for parents, and higher rates kick in sooner.

The good news is that you may be able to cut the kiddie tax down to size if you apply one or more of the following strategies:

1. Minimize transfers. Don't go overboard putting money in your child's name. No kiddie tax is due if the child's 2018 investment income stays below $2,100. This kiddie tax threshold stays the same as it was in 2017.

2. Monitor the situation. As the year progresses, you may avoid transactions that would trigger the kiddie tax. For instance, you might defer short-term gains on sales of securities.

3. Invest tax-wisely. Consider investments in growth stocks that produce little or no dividend income, or tax-free municipal bonds or bond funds. Time your investments so that any unearned income is only collected when it falls below the $2,100 threshold.

4. Use other methods of transferring income. One possibility is to have your teenager work for your company during the summer. Because this income is "earned," it doesn't count towards the kiddie tax calculation.

Give us a call if you have questions about how the kiddie tax may affect your situation.

© MC 2018