As always, two things remain constant: (1) you will get older every day and (2) you will get taxed all along the way. In this article, I’ll explain some key age-related tax and financial planning milestones to remember for you and your loved ones, taking into account changes included in the new Tax Cuts and Jobs Act (TCJA).
Age 0-23: Kiddie tax can bite even harder under the new law
Under the dreaded Kiddie Tax rules, part of a young person’s investment income can be taxed at the federal rates for trusts and estates, which can quickly rise to 37% or 20% for long-term capital gains and dividends (see below). Compare those rates to the 10% or 12% rate that would typically apply to a young single taxpayer’s ordinary income and short-term capital gains, or 0% for a young single taxpayer’s long-term capital gains and dividends, in the absence of the Kiddie Tax rules.
Even worse, the Kiddie Tax can bite younger taxpayers who are no longer really kids — potentially up until the year they turn age 24. However after the year a young person turns age 18, it can only bite if he or she is a student with at least five months of full-time school attendance during the year.
For 2018, the Kiddie Tax can only bite investment income in excess of the threshold amount of $2,100 (the threshold is adjusted for inflation every few years). Investment income below the threshold is taxed at the young person’s lower rates.
Before the TCJA, the Kiddie Tax was charged at the marginal federal income tax rate of the parent(s), which would usually be lower than the trust and estate tax rates that apply for 2018-2025. So the new law can make the Kiddie Tax more expensive for young folks with significant investment income.