The Tax Reform Act of 1986 created the adolescent tax as a way to anticipate parents from alive advance assets to accouchement in adjustment to cut the all-embracing tax bill for the family. Over the years, the adolescent tax has undergone some changes, best conspicuously in the age to which it applies. The Tax Cuts and Jobs Act of 2017 (TCJA) badly afflicted the way in which the tax is computed.
The adolescent tax is not a abstracted tax, but rather a adjustment of accretion tax on a child’s unearned assets over a beginning bulk (Code §1(g)). The antecedent of the unearned assets (e.g., as a allowance from a ancestor or grandparent or as an advance of a child’s becoming income) is irrelevant.
The adolescent tax applies for a adolescent with a active ancestor and who is beneath age 18 at the end of the year, age 18 but beneath than 19 and becoming assets that does not beat bisected of his or her support, or age 19 but beneath 24 and a full-time student. It does not accommodate a adolescent who files a collective acknowledgment with addition taxpayer. The analogue of a adolescent for purposes of the adolescent tax has not been afflicted by the TCJA.
Unearned assets agency dividends, absorption income, basic assets (including basic accretion distributions), rents, royalties, unemployment compensation, and the taxable allocation of distributions from retirement affairs and annuities as able-bodied as the taxable allocation of Social Security benefits. And it includes distributions of unearned assets from a assurance in which the adolescent is a beneficiary.
If a adolescent has becoming assets from a job or self-employment, it is burdened to the adolescent application the child’s bordering tax ante for a distinct taxpayer. Thus, becoming assets in 2018 can be burdened at ante alignment from 10 percent to 37 percent. The assets would be tax chargeless up to $12,000 in 2018 (the bulk of a distinct person’s accepted answer amount).
If the adolescent has unearned income, the way in which it is burdened has been adapted by the TCJA. The aboriginal $2,100 of becoming assets in 2018 is burdened as follows: no tax on $1,050 (the accepted answer bulk for a abased adolescent with no becoming income); the aing $1,050 is burdened at 10 percent. Thus, the absolute tax on the aboriginal $2,100 of unearned assets is $105.
Unearned assets over $2,100 is now burdened to the adolescent application the tax ante applicative to trusts and estates. Instead of the seven tax ante for individuals, the child’s tax is addition application the four ante for trusts and estates. These ante are 10 percent, 24 percent, 35 percent, and 37 percent. The top tax bulk applies in 2018 to taxable assets over $12,500, so it’s accessible to attain the accomplished tax bulk on almost bashful advance income. In contrast, a distinct being not accountable to the adolescent tax would pay aloof 12 percent on the top dollars of $12,501 of taxable income.
So the aboriginal $2,100 of unearned assets continues to be burdened the aforementioned as before, for a tax of $105. But if unearned assets is added than $2,100, it is burdened college than beneath the above-mentioned rules area the parent’s top bordering bulk was acclimated to compute the child’s tax.
Similarly, the favorable bulk acclimated for able assets and abiding basic assets now depends on the child’s taxable income. Thus, the adolescent could calmly pay a 20 percent bulk on able assets and abiding basic assets alike admitting the ancestor is alone advantageous 15 percent on such advance income. The beginning at which the 20 percent applies for the adolescent tax is $12,500 of taxable income, as compared with $479,000 of taxable assets on a collective return.
A adolescent may be accountable to the another minimum tax (AMT). A adolescent who is accountable to the adolescent tax is disqualified to use the absolution bulk applicative to distinct individuals ($70,300 in 2018). Instead, a appropriate AMT absolution bulk applies (Code §59(j)). For 2018, the child’s AMT absolution bulk is $7,600 (Rev. Proc. 2018-18, IRB 2018-10, 392). The absolution bulk is added by the child’s becoming assets (but the absolute cannot beat the absolution bulk for a distinct person).
A adolescent may additionally be accountable to the net advance assets (NII) tax, which is 3.8 percent on the bottom of net advance assets or the balance of the child’s adapted adapted gross assets over $200,000.
In the past, a ancestor could opt to address a child’s dividends, absorption income, and basic accretion distributions on his or her return. This may accept been a acceptable advantage to abstain the charge to book a abstracted acknowledgment for the child. Form 8814, Parents’ Election to Address Child’s Absorption and Dividends, was acclimated for this purpose; it could not be acclimated if the adolescent had any added blazon of unearned income. Of course, the child’s assets again counted as the parent’s income, which could abate or bar assertive tax break based on adapted gross income.
Now, a ancestor can still do the aforementioned for the aforementioned blazon of unearned income. As in the past, this advantage is bound to a adolescent with dividends, absorption income, and basic accretion distributions up to $10,500. Form 8814 is still acclimated for this purpose. But if the child’s unearned assets is greater than $10,500, the ancestor cannot opt to address it on his or her return; the adolescent charge book his or her own return. And if the adolescent has any tax alternative items (e.g., assertive tax-free absorption on clandestine action bonds), they are taken into annual on the parent’s acknowledgment for AMT purposes.
The adolescent tax may not be a cogent affair for abounding families. As before, affluent families will acceptable abide to about-face income—directly or through trusts—not alone as a agency of tax accumulation but for added purposes (e.g., asset protection, assumption planning). Of the added than 9.3 actor allotment filed by audience in 2016, alone 265,500 audience appear the adolescent tax (https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income). But it continues to be a affection with which families charge deal. The TCJA fabricated it easier to bulk the adolescent tax because it is no best all-important to apperceive the bordering ante of the child’s parent. But for abounding of those accountable to the adolescent tax, it has aloft the bulk of taxes that will be paid on unearned income.
Sidney Kess, CPA-attorney, is of admonition at Kostelanetz & Fink and chief adviser to Citrin Cooperman & Company.
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