You’ve probably heard by now that the IRS plans to issue a post-card sized 2018 tax form to allow taxpayers with the simplest of returns to file on. While “tax simplification” is an admirable goal, is it really possible when the objectives of the tax code are to meet and balance social, political and revenue goals/needs? Let’s just say that, as a CPA who prepares tens of returns each year, I have no worries about job security in my lifetime.
Tax simplification is one of the biggest misnomers coming out of Washington, where Congress purportedly makes it easier for all of us to fill out our tax returns by adding several thousand pages of new rules, rates and lists of things we can and cannot deduct under new lists of circumstances. The most recent version, which includes a complicated deduction for individuals participating in S corporations, partnerships, LLCs and sole proprietorships (with regulations running no fewer than 184 pages); new rules governing the deduction of alimony payments; what new payments can be made, tax-free, out of 529 plans; and restrictions on state and local tax deductions for federal tax purposes, are excellent examples of more complexity, not less.
But one actual reduction in complexity came with reform to the so-called “Kiddie Tax.” Under the old law (warning: get ready for some real complexity), a dependent child under the age of 18, or under 19 who provides less than 50% of his/her support, or a full-time student under the age of 24 would divide his/her income into two buckets: earned and unearned (investment) income. If parents claimed the child as a dependent on their tax return, the child’s standard deduction would be the greater of $1,050 or the child’s earned income (W-2), plus $350 (limited to the standard deduction amount of the parents). If the unearned income was more than $2,100, the investment income—but not the earned income—would be taxed at the tax rate of the highest-income parent. Did you get all that?
Under the new 2017 tax act, each child’s tax is calculated using the tax rates that apply to trusts, rather than the parents’ tax rates. Unlike individuals, trusts have just four brackets for ordinary income: 10% (up to $2,550), 24% ($2,551-$9,150), 35% ($9,151-$12,500) and 37%, with the top rate applied to all income over $12,500. For long-term capital gains, different rates apply.
Of course, that means that children get to the highest tax rate with far less income than, for example, married individuals (where the top rate kicks in above $600,000 in taxable income) or heads of household ($500,000). But at least the calculation is simpler—certainly a rarity in our history of tax “simplification.”
For children with expected investment income greater than $2,550, and especially over $9,150, it’s worth examining whether the “income shifting” planning that is currently in place, still makes sense. Setting up and funding custodial accounts for minors, going forward, definitely won’t be as simple as it once was.
If we can be of help with setting up custodial accounts or planning kiddie income, or if you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post