Congress made a big change to the so-called Kiddie Tax when it overhauled the tax code in 2017. But when lawmakers learned its terrible consequences, they switched back.
This zigzag is giving some taxpayers important choices on 2018 and 2019 tax returns. Others, such as generous parents or grandparents, need to relearn how Kiddie Tax rules will apply for 2020 and beyond.
Let’s recap. Congress passed the Kiddie Tax in 1986 to prevent wealthy people from giving income-producing assets to their children to take advantage of their lower rates.
The levy imposed income tax on children’s “unearned” income at the parents’ tax rate, above a small exemption. For 2019 and 2020, the exemption is $2,200. The tax doesn’t apply to a young person’s earned income, say from being a camp counselor.