2019 Kiddie Tax Calculation

[Ninja1]

I have one minor child (no siblings) who has capital gain (78K long term capital gain) in 2019 and needs to pay kiddie tax.  I chose the pre-TCJA rules because I thought it would result in lower tax than using the trust tax rate. ( I have 58K of taxable income in 2019 filing married separate.)  However, the result was contrary and the calculation using Turbo Tax was that the child pays about 4K more tax compared to using trust tax rate.  

Is the kiddie tax rule for 2019 different from the one in effect during past years, like 2016 when my child filed the form 8615?   I thought the rules remain the same, though not 100% sure. 

I noted that the current tax form 8615 has changed from 2016.   Especially in the 2019 instructions of form 8615,  please look at line 11 in the  '2019 Tentative Tax Based on the Tax Rate of Your Parent Worksheet' (page 5 of instructions), which is not the same as line 15 in the previous year's 8615.   I think that the current worksheet makes the final tax larger than what the kiddie tax rule requires, assuming that the kiddie tax rules have not changed since.  (I could not write up all the details here, but if you compare the current form/instructions and the 2016 form for the part I mentioned, you will see what I mean to say - sorry about that). 

Simply put, according to the current form/instructions, it seems that the kiddie taxes are 1) the traditionally calculated kiddie tax + 2) tax calculated solely on child's income.  1) and 2) should not be added, but should be compared and the child should pay the higher amount, to my understanding.

Perhaps I may be wrong.  If anyone has some insight on this matter, please share your thought.  I'd appreciate. 

[AmyC]

The Kiddie Tax was changed in 2018 and remains through 2025. For a good description of the changes, see Understanding the new kiddie tax - Journal of Accountancy and Kiddie Tax - Internal Revenue Service and some examples Understanding the new kiddie tax: Additional examples ....

[slowreader]

>I chose the pre-TCJA rules because I thought it would result in lower tax than using the trust tax rate. ( I have 58K of taxable income in 2019 filing married separate.)  However, the result was contrary and the calculation using Turbo Tax was that the child pays about 4K more tax compared to using trust tax rate.  

Yes, I have seen the same thing, and I am sure this is an error on the part of TurboTax. The same child who was dinged for less than $200 when included on her parents' tax return in 2018 gets hit for nearly $3000 using the new rules. (She had a job summer of 2019 and tax was withheld, so she had to file her own 1040.) When I reverted to the supposedly punitive Kiddie Tax rules, the tax due dropped to about $900 including some FICA tax. As in your case, the parents' income was a bit more than $50,000. Just for fun, I added the girl's income to the parents' and came out to about $200 tax owed. This is what SHOULD have happened under the new rules -- the child's income taxed at the parents' rate.

[slowreader]

Two additions to my post:

1) When I say "new rules," I mean the option to use the supposedly helpful pre-2017 tax law rules.

2) It seems to me that what happens is the step at which the parents' "qualified dividends" are inserted. The tax due then LEAPS. I conclude that TurboTax is actually taxing the kid on the parents' income! 

[Ninja1]

Thank you for the response.  But my question relates to how to apply Kiddie Tax under the old rules which existed prior to 2017 and whether there has been any change between the pre-2017 old rules and the current rules in 2019 in case one elects to be taxed not using the trust tax rate, but the parent's marginal tax rate.   In my case, Turbo Tax calculates taxes differently using the pre-2017 old rules and new rules electing the parent's marginal tax rate and results in much higher tax using the new rules.  I just do not understand this.  Thanks again. 

[slowreader]

No, we're talking about the identical problem. 1) The old rules required us to use parents' tax rates for kids. 2) the 2017 revision required us to apply punitive trust rates to kids, so that they would up paying at rates otherwise applicable to people earning in excess of $500,000 a year. 3) Last year Congress fixed this by giving us the option to go back to the old rules for 2018 and 2019. 4) The result, because of TurboTax's mistake, actually INCREASES taxes on families where the adults are middle income, say $50K. 5) As a result, we're virtually forced to pay the punitive trust rates, UNLESS:

Unless we go back and devote hours or days or weeks to mastering the IRS Form 8615. I am going to devote May to this, taxing advantage of the China Virus postponement of Tax Day to July 15. If, as I believe, it results in a savings, I am going to Amazon and post a one-star review on my verified purchase of TurboTax Deluxe.

This is a monstrous error IMHO.

[slowreader]

>taxing advantage of the China Virus postponement of Tax Day

What an irritating forum! TTax can't even do that right! We aren't allow to edit our posts.

That should of course read TAKING ADVANTAGE of the China Virus ....

I have been using TurboTax since the early 1990s, when it was a DOS program. This is the first time I've seen a major goof that must be costing hundreds of families a lot of money.

[whatusername]

I waited until July 2020 to file my son's 2019 return so all forms were updated but TurboTax didn't calculate it right.  I  calculated with pre TCJA and post TCJA, and using pre TCJA  appeared to be slightly less. 9 months later I receivd a tax refund for almost the full amount of tax.   He had dependent child Social Security income, dividends and capital gains and a small amount of earned income.  IRS notations were that there was an error in Taxable Income and Tax Computation (TT said he owed $4600 and IRS said 160, rounding)

I filed a paper return for 2019 which I assume accounts for the delay.  

I recommend that people recalculate 2019 with another program or maybe use 2020 as a test.

[slowreader]

Our family had a very similar experience. I finally gave up on my granddaughter's 2019 return. Her mother took over the task and, like you, managed to get a disappointingly small reduction in the girl's taxes but a few months later got a huge refund from the IRS with no explanation.

The painful experience was 2018, but that was a result of the 2017 tax changes and no fault of TurboTax's. But I agree: TTax did a miserable job with the 2019 kiddie tax when using the parents' tax rates. 2020 seems to be okay. (According to her mother. I am no longer the family tax accountant!)

[CA_user]

My experience with TurboTax Premier for tax year 2020 indicates the Kiddie Tax is still calculated incorrectly.  It's 6/5/2021.  I've downloaded all the latest updates, but from what I can see, my kids' unearned incomes are being taxed at the tiered estate tax rates.  I'm now going to have to use the paper form to see what calculations I get.  When looking at the TT Form 8615 (Tax for Certain Children Who Have Unearned Income), it appears TT is calculating the combined parent/child tax amount on line 9 incorrectly, resulting in line 11 being too high.  This means line 18 (the child's tax) is also too high.  I took the income amount on Form 8615 line 8 and plugged it into tax calculators from SmartAsset.com, Intuit, and H&R Block.  All three returned values about $4000 less than what TT Form 8615 calculated!  I seem to recall that TT from a year or two ago had a box you could click to calculate taxes according to pre-TCJA rules, but that's nowhere to be found now.  I'm really disappointed I must do extra work for something TT should have fixed long ago.

[CA_user]

If anyone is having problems with the way TurboTax 2020 is calculating the Kiddie Tax, you might want to read all three pages of this post: https://ttlc.intuit.com/community/taxes/discussion/how-is-daughter-s-tax-rate-31-she-received-unempl...

There appears to be a bug in Form 8615 calculations.  One person has posted a workaround that might apply in some cases.  While trying to implement the workaround, I discovered my numbers were off due to confusion between each child's Schedule D (or lack thereof) and the Form 8615 Schedule D worksheet.  So I can't say for sure if the June 2021 updates have fixed the problem of high tax numbers (presumably because Form 8615 might be using estate tax rates instead of the parents' marginal rate).  If they haven't, you can try the workaround listed above.

[philipwing]

I'm not a tax professional. My staff accountant wife who has passed the CPA exam but didn't do the apprenticeship is closer, but still has me do it because I trade Listed Stock Options with Margin Interest. Professionals can screw those up.

OTOH, my two daughters, now 21 and 27, had UTMAs and now regular accounts their entire lives, so I've been dealing with Kiddie Tax, both Federal and California for decades… In TurboTax, and MacInTax before they bought it.

One thing I'm not seeing in this discussion and I'm wondering if people are remembering to do is that child with Kiddie Tax is not suppose to be claimed on the parental return. I'm not seeing an easy way to do this other than delete the child for federal and add them back in for states who do it the old grabby way (like California - guess where we live… 😅). If I don't delete that child, TurboTax doesn't seem to give me an option to just do a radio button and not claim them. They do ask on the child's return about whether someone is claiming them as a dependent but running things out last night with the 8615, TurboTax seems to ignore this conflict.

FYI, TCJA eliminated the need to manually link the parental return to their dependents and each of them to each other at the federal level. Unfortunately, in states like California, they're still linked together, so one person (in our case, me) must do the returns all together. And just for those who keep thinking it's a ripoff, my daughter has an over $3300 higher Federal Tax bill because something in TurboTax ran it the pre-TCJA way.

Oh, and the trust tax rate isn't just for over $500k, although it might have changed from when my mother died in 2002 and I had to administer her Living Trust, which you all should set up so those you leave behind can avoid Probate Court. Back then, I *had* to have a professional do it because one could only do trusts in TurboTax in a Windows Only version. And I had to file an amended trust return because he *swore* Margin Interest wasn't deductible (Form 4952).