the $3,750 of tax free qualified div/ lt capital gains is essentially based on TCJA (pre-SECURE Act) kiddie tax rules that require you to use trust tax brackets for the tax calculation of kid's unearned income.
Trusts have the following QDCG tax rates:
0% ... 0 - 2,650
15% ... 2,651 - 13,150
20% ... 13,151 +
So under TCJA (before SECURE Act changed it back for 2020 onwards)
$4,850 of qualified dividends would not be taxed. The calculation is as follows:
$4,850 of income (all qualified dividends)
-2,200 (twice the standard deduction for a dependent child with only unearned income, though the number is indexed to inflation, kiddie tax has always essentially exempted 2x the unearned income standard deduction)
---------
2,650 taxable income subject to trust tax rates.
In other words, it all falls into the 0% tax bracket for trusts mentioned above.
SECURE Act gives the option to use the pre-TCJA rules for the kiddie tax (i.e. re-doing the parents tax return to include the kid's income and figure the tax) or continuing to use the Trust rates as TurboTax apparently programmed their system to do for 2019 tax returns.
For 2020 and onwards, I believe using trust tax rates is no longer an option.
Thus a kid with between $2,200-$4,850 of unearned income that is all qualified dividends or LT Cap gains, can no longer take advantage of the small sliver of a 0% trust tax rate on that type of income. If his/her parents have taxable incomes that push all of their qualified dividends between 2,200 and 4,850 or LTCG into the 15% bracket, Congress did them no favor with the SECURE Act.
Those kids with unearned income other than QD or LTCG, on the other hand, will most likely benefit by having their income picked up at their parents rate as opposed to trust tax rates.
SECURE Act made the change retroactive giving the option to amend 2018 & 2019 returns if already filed using trust rates as req'd by TCJA.
You can forgive tax accountants if they just were getting a hang of the implications of the kiddie tax changes only to have the switched back a couple years later to the good old kiddie tax rules. The old way of doing things, i.e. computing tax on kids investment income as if it were taxed at parents rates, is really not a lot of fun as you can see from the new instructions to 8615 ( https://www.irs.gov/pub/irs-pdf/f8615.pdf ), especially when there are more than 1 dependents with unearned income.
