Kiddie Tax Taxes More Than You Might Think!
Does Congress really think they can clear up the deficit by penalizing children's earnings?
Are there SOOOO many children with unearned income that their earnings should be penalized by having them pay taxes at their parent's higher tax rate?
OK, I understand the investment income issue - with parents and grandparents wanting to transfer assets into the hands of children, allowing a small part of the earnings to be taxed at the child's lower rates (up to $1900). I understand assets like stocks, real estate, trusts, etc.
But ALL unearned income?
Are they nuts?
They define INVESTMENT INCOME as all unearned income. Everything. Not just interest, dividends and capital gains/distributions, but rents, royalties, trusts, pensions, annuities, and more.
That means taxable scholarships, it means prizes, it means any kind of miscelleous income that did NOT come from their parents.
It means distributions from IRAs, and the taxable part of 529 plans, and who knows what else.
AND it means the taxable portion of Social Security, too.That is ALSO taxed at the parent's highest rate.
Have you been reporting it correctly? Thank goodness I haven't had any clients with children who had these issues. But, who would ever have expected "Investment Income" to mean EVERYTHING?
I really hope our Senators' and Representatives' children's unearned income is being taxed correctly.
Anyone want to audit them?
Eva Rosenberg, EA
Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.