Impact of Revised 'Kiddie Tax' on Giving Assets to Children
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What is the main topic discussed in this episode?
Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. Before you hand over stocks or other assets to your child or grandchild, listen to Wall Street Journal reporter Laura Saunders outline changes to the so-called kiddie tax. That's coming up in a moment. First, these money headlines. were offered medical benefits from their employer in March.
What is the revised 'kiddie tax' and why does it matter for gifts to children?
That's up from 67% in 2017 and the first time the rate has increased since 2012. The portion of employees offered medical benefits at work had been slowly declining. The reversal in the past year occurred as unemployment fell to 4.1% in March, from 4.5% in the same month, of 2017. And Wall Street Journal intelligent investor columnist Jason Zweig reports, for the first time, brokers will be explicitly required to act in the best interests of their customers, not their own paychecks, when they make investment recommendations under new rules under review by the SEC. On top of that, SEC Chairman Jay Clayton has said that some sales contests, like competitions in which brokers earn rewards for selling specific investments, are in danger of going by the wayside.
This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. It's one thing when the grandparents come to town and slip a grandchild a $20 bill. It's another thing when they want to give investments to youngsters to pay for college or other expenses. And as usual, that's when Uncle Sam comes sniffing around. Wall Street Journal tax reporter Laura Saunders joins us to explain how the so-called kiddie tax plays a role.
How did the tax overhaul change the age and rate structure of the kiddie tax?
So Laura, this tax isn't new. It was passed by Congress in the 80s, but the tax overhaul law changes the rules.
Yes, it changes them a lot. The law has been changed several times since the 80s and it's gotten the ages crept up from 14 to 24 and things like that. But this was a big change in the tax rates. And instead of the income of the investment income, the unearned income of children being taxed at the parent rates, It's now going to be taxed at trust tax rates. And that doesn't sound like much, but it makes the law a whole lot simpler. And that's really good because in the past, parents had to tell their children how much money they had so the children could file their own tax return.
Oh, they had to kind of pull the curtain back and show them.
Yes, that's exactly right. Those were awkward conversations. And so now you don't have to do that anymore. And that's a very good thing about this law.
One of the more significant changes involves the threshold to trigger the 20% capital gains tax.
Yes. Well, all the thresholds are different now because when you move from individual tax rates to trust tax rates, it changes. But for instance, with a capital gain, say you gave your grandson some stock to pay for tuition so he could sell it and pay tax at his rate. Well, the tax on that gain changes. The top rate kicks in at $12,000 instead of $400,000, more than $400,000 last year.
Oh, wow. And so if they're paying for college with this, college being a lot more expensive than $12,000, there could be a lot more tax than it might have been just a couple of years ago.
A surprise tax. Yes, exactly.
How does taxing children’s unearned income at trust rates affect capital gains?
And so the caveat here is that anybody who's thinking about making a gift to a child or grandchild that is going to incur some kind of income tax really needs to take a real hard look at these rules before they do it.
In some cases, it might be a good idea to give a child funds in the form of a Roth IRA.
Yes, well, that's another thing is if you want to set up, say, something in your estate for a child to inherit, people say, oh, give your grandchild an IRA. Well, try not to give them a 401k or a traditional IRA because that generates income that's taxable that could be taxed at these new rates. Instead, try to leave them a Roth IRA, which it doesn't have taxable income. That's the best thing a grandchild or child could ever inherit.
And in the kiddie tax, I think we alluded to this earlier, it doesn't just apply to investment income.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:39
2
What is the revised 'kiddie tax' and why does it matter for gifts to children?
0:39–1:53
3
How did the tax overhaul change the age and rate structure of the kiddie tax?
1:53–3:36
4
How does taxing children’s unearned income at trust rates affect capital gains?
3:36–4:34
5
Why might a Roth IRA be a better gift than a traditional IRA or 401(k) for heirs?
4:34–5:37
6
Which types of income are subject to the kiddie tax and when should you seek professional advice?
5:37–5:50
7
What surprising tax consequences could arise when using gifted stock to pay for college?
5:50–5:54
Speakers
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