Take a good look at the new Kiddie Tax before making gifts to children and grandchildren.
Beginning in 2018, youngsters who are subject to the Kiddie Tax (under 18 or in college and under 24) will pay tax on their unearned income using the same tax tables as trusts rather than using their parents’ tax rate.
For example, the maximum 20% capital gains tax is imposed on trusts when taxable income reaches $12,700. Last year, that rate wasn’t imposed on an individual until taxable income exceeded $400,000.
Throughout the tax tables, higher tax rates are imposed on trusts at much lower income levels than for individuals.
Trust Brackets on Taxable Income
10% of the first $2,550
24% from $2,550 to $9,150
35% from $9,150 to $12,500
37% of all income over $12,500
Single Brackets on Taxable Income
10% of the first $9,525
12% from $9,525 to $38,700
22% from $38,700 to $82,500
24% from $82,500 to $157,500
32% from $157,500 to $200,000
35% from $200,000 to $500,000
37% of all income over $500,000
So since pension accounts are considered unearned income, you should review the beneficiaries of your Traditional IRAs to see if any of the beneficiaries are subject to the Kiddie Tax and make the beneficiary a parent or guardian until the child is old enough to avoid the Kiddie Tax. Roth IRAs are not taxable, so those are fine to have a Kiddie as beneficiary.
The same goes for gifting appreciated stock and having Kiddies as beneficiaries in your will.
You should check out all these opportunities to make sure you are not creating a tax nightmare for you children or grandchildren.
