With the TAX CUTS AND JOBS ACT, dependent children's unearned income filed in their names has no connection to the parents returns.
What I'm trying to understand is the difference between, say, a child with only $5000 of interest vs a child with only $5000 of qualified dividends.
The $5000 of interest only calculation I understand, though it's slightly complicated. The tax is $418.
1) Remove $1100 of standard deduction from the $5000 to get $3900 of taxable income.
2) Remove $2200 of net unearned income threshold from $5000 to get $2800 of net unearned income
3) The tax on the $2800 of the $3900 is $308 ( 10% of the first 2600 = 260 + 24% of the next 200 = $48)
4) The tax on the other $1100 of taxable income is a straight 10% or $110
5) $308 + $110 = $418. Exactly what turbotax computes.
Now the case of $5000 of qualified dividends mystifies me.
1) There is still $3900 of taxable income.
2) Turbotax computes $30 of tax.
3) The part I do understand. There is $2800 of unearned income. It gets taxed by the 2018 Trust and Estate Rates of $0 for the first $2600 and 15% of the rest, which is $200 = $30. There's my $30. OK.
4) The part I do not understand: why is the remaining $1100 not taxed anymore at 10% or $110? Giving a total tax of $140. TurboTax says, just the $30. How can that be? Is there a rule I'm ignorant of?
The law was reversed last year, according to the Wall Street Journal today
https://www.wsj.com/articles/time-to-go-back-to-school-on-the-kiddie-tax-[phone number removed]
It's not a phone number! And removing it disables the link. So you must add -[phone number removed]
What a great system. TTax doesn't provide an answer, and when I try to, the link is disabled. Good job, Intuit!
Okay, try this shortened url: https://tinyurl.com/kiddietax
For 2019, the word "reversed" is misleading.
it was **optionally** reversed for 2019 and even retroactively 2018.
The new rule is forced only starting in 2020.
From https://www.sfchronicle.com/business/networth/article/Congress-reversed-kiddie-tax-change-that-14990324.php for example:
The provision titled “Tax Relief for Certain Children” completely reverses the kiddie-tax change made in 2018, starting with tax year 2020. However, it also says that subject to the Treasury Department issuing guidance, taxpayers can choose to apply the repeal to the 2018 and 2019 tax years or both.
In 2019 there is a choice so my question for 2019 still is important.
since i posed the question, i pinpointed the location where TurboTax
does something mysterious.
on the form 8615 QDCG Wks line 8, it says enter $39,375 if single etc.
but rather it puts in another number (e.g. 3700 in the qualified case)
which it puts directly into the 0% tax bracket. Nice to have!
There is no clue to how $3700 is calculated, but it is clearly
somehow $1100 + $2600. Why turbotax can't put that on the worksheet is beyond me.
The $2600 smells like a mistake that should be $2650 corresponding to the trust and estate
0% bracket.
The $1100 is a surprise, which says that if you don't have interest income, you get to do even
$1100 more at 0%. That's a nice surprise.
If the 8615 QDCG was only more transparent on line 8, we wouldn't have to try to guess what's going on.
I gather from the lack of response from the community, nobody else seems to know either. (????)
The IRS has (at last!) updated its Form 8615 form and instructions for 2018, but TurboTax unfortunately has not. Apparently therefore we are left to calculate the "worksheet" ourselves.
(I downloaded the PDFs from irs.gov yesterday. The instructions booklet is marked "Rev. February 2020".)
I am astonished that the IRS and TurboTax and indeed the Wall Street Journal could be so behind the curve on this.
For thousands of college students and "Gold Star" children, the 2019 reversal of the 2017 Kiddie Tax is an incredible boon -- or, more accurately, an overdue relief from injustice. Taxed at trust rates, they owed for 2018 and would have owed for 2019 an obscene portion of their "unearned" income. (For the young woman whose taxes I am doing, the hit was over $5000 last year, amounting to 18 percent of her income. Taxed at her parents' rates, it should be under $300.)
Unfortunately, at this time, TurboTax has not made the adjustments for the Kiddie Tax. Please check back soon.
MaryK1101's response was also irrelevant.
The older computation remains unchanged and remains mysterious.
Form 8615 QDCG Worksheet line 8 is as mysterious as ever.
I've accepted that nobody is going to tell us how that number is calculated.
Well, if you're trying to figure the Kiddie Tax under the alternative calculation (using parents' tax rate rather than confiscatory Trust taxes), her reply wasn't helpful but it was indeed relevant. We are assured that TTax is "working on it." My own plan is to file for an extension for the students whose taxes I am trying to prepare. That gives us till September to straighten it out. There won't be any penalties because one grossly overpaid last year and the other didn't file a 1040.
I have tried to work out the calculations for myself, and more than ever I am grateful that TTax does this stuff behind the scenes. No doubt there are a few math/tax whizzes who can do it with pencil and calculator and the IRS instructions, but I'm not one of them. I presume that your person's taxes are frightful. That's because 2018 and 2019 TTax is still using the Trust rates -- nothing mysterious about them, alas! Kids are being assessed up to 23.8% on capital gains and qualified dividends, and up to 40.8% on other unearned income. Those are rates normally applied to individuals with over $500,000 in income.
if there is nothing mysterious then why can't anyone answer how the scenario that i posed is calculated?
Only a tax geek of the highest order would be able to analyze your situation and determine if TurboTax is filing correctly. And they would need all your tax returns and tax documents to do it.
You can buy TurboTax Live consultation but the CPA is assigned randomly. Good Luck with that!
I'd like to keep this polite, and I will, but the responses I see seem silly.
For example >> And they would need all your tax returns and tax documents to do it.
so let's be clear. I created a test case which couldn't be simpler.
The test case is a dependent who has $5000 of qualified dividends.
That's it. That's all the input to the system. Nothing more.
I set up a 1099 div and put 5000 in 1a and 1b. You can do this yourself
in 10 seconds. Turbotax is now saying the tax is $23
With the TCJA rules, there's the 1100 standard deduction on line 9
leaving 3900. That's not rocket science.
The computation was 15% of (5000-3750). So this is not higher order mathematics.
This gives $23.
My question is what is this $3750? This is NOT a math whiz question. So I wish to politely
ask you not to keep saying it is.
It appears on line 8 of the 8615 QDCG worksheet, where it says enter $39,375 if single, and there it is
$3750. A magic number from thin air.
it's okay that tax accountants don't know but not so nice that they don't want to admit they don't know
and try to hide the ignorance in a complexity that's not there. There is a difference between complexity
and lack of transparency. What's going on here is the latter not the former.
.
Aha I found the answer, and no , one doesn't need a math whiz.
In the turbotax 8615 QDCG worksheet line 8 where it says
Enter $39,375 if single, etc. What it should have said is
enter that or $2650 + (Form 8615 line 6), whichever is smaller.
Thank you very much for nobody telling me this.
I finally found this on page 3, top right of https://www.irs.gov/pub/irs-pdf/i8615.pdf
where I quote "Add Form 8615, line 6, and $2,650. Enter the smaller of the result and the amount listed below for your filing status"
so it's official, you are allowed to take out another $1100 besides the $2650 meaning you can have
$3750 of qualified dividends before paying tax.
The new law optional this year and required next year , hailed as a great thing, will be a bummer for a kid who just has a few qualified dividends next year it seems.
The actual bottom line of this analysis is that you can have $4850 of qualified dividends only
and pay no tax under TCGA. I don't see this anywhere written but it's true.
You subtract $1100 for the standard deduction and another $3750 = $2650 + $1100
as described in https://www.irs.gov/pub/irs-pdf/i8615.pdf on page 3, right column, line 1
and boom no tax.
Like i said, this goes away next year it seems.
... but no, not higher wizardry required to understand.
TurboTax for 2019 has now been updated. The update is marked CRITICAL and apparently does involve form 8615.
Okay! One has to use the Step-by-Step, and then (and only then) does the question pop up: Do you wish to use the pre-TCJA rules?, or some such language. I click yes, and the next question is the parents' taxable income, and we are off to the races. Thank you, Inuit!
I hope TurboTax will make it as easy to file a 1040X for 2018....
The first $1100 is not taxed (standard deduction).
The next $1100 is taxed at the child's single rate which is 0% for a LTCG or Qual Div.
The Estate & Trust rates are applied next. The first $2600 is taxed at 0% for a LTCG or Qual Div.
From $2601 to $12,950, it jumps to 15%, and at $12,951, the rate increases to $20% and an additional 3.8% NII tax kicks in.
You don't have to use the Trust tax rates if the parents' tax bracket are more favorable, as they are in the case of most "gold star" children (who receive money in partial compensation for parents killed in line of duty) and many college students (whose grandparents may have gifted assets to them as they were growing up). In a typical case, parents' capital gains are taxed at zero up to $39,375 - $78,750 depending on filing status, whereas the zero rate is limited to $2,650 in the Trust rates. Now think of the tax hit on a young woman who sells enough stock to pay for a year of college!
The 2019 TurboTax has been updated to provide the alternative and in many cases more favorable method of filling out Form 8615, but the 2018 edition has not.
many people are talking about the advantages of not using the trust rates
but i bet there are many people who will find it advantageous this year
to use the trust rate method .. and nobody seems to be talking about that...
I doubt that its "many". You'd have to be taking in $500,000 a year before you'd pay taxes at the rates assessed on a 20-year-old college student with "unearned" income of $32,000, about a third the cost of year at an Ivy after transportation, health insurance, and $5000 Federal income tax.
You'll find out next year, when the "alternative" becomes mandatory.
I think if parents are paying taxes on qualified dividends at 15% (ordinary income between $78,751-$488,850, a pretty broad range), then the TCJA rules are more favorable for a wide range of children's qualified dividend income.
This is my understanding:
Both TCJA rules and pre-TCJA rules have an $1100 standard deduction, with the next $1100 taxed at the child's rate. The rules start to differ above $2200 of unearned income.
TCJA (estate rules):
$0-$2650 (above the first $2200): 0%
$2651-$12950: 15%
$12951+: 20%+NIIT
pre-TCJA:
all of this is taxed at 15% (+NIIT if the parents are at or kicked above the threshold for that)
I'm not an accountant so if anyone has any corrections for the above I'd be happy to hear it. But it seems the TCJA rules will be the same as pre-TCJA rules for those under $2200, and the TCJA rules will be favorable for most people with children's unearned income between $2200 to something north of 2200+12950.
If I understand properly, re-TCJA rules are advantageous for children whose parents have ordinary income under $78,750, or for those with unearned income more like the $32000 example given earlier (I haven't done the math to figure out where the 20% estate rate costs more than the savings at 0-2650).
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.
100% agree.
For 2020 taxes, the SECURE computation gives no choice, and despite all the fanfare
that it's a win, it seems like it could easily be a loss for many families.
For example, the 2020 law is an obvious loss for those
with between $1100 and $3750 of unearned income as now it is being taxed and before it wasn't.
I'm also guessing if parents are in a 32% tax bracket, in many cases, the new law again is a lose.
Possibly even if the parents are in a 24% bracket (if the unearned income is less than $10,000 maybe, haven't done the math yet.)
When i look at the numbers, i'm surprised how people think this is a good idea for them.