Trump Accounts Shine Spotlight on Kiddie Tax Rules

Now that Trump accounts have officially gone live, it's important to understand the potential application of the so-called kiddie-tax when the beneficiary becomes entitled to withdraw Trump account funds or execute taxable Roth conversions. Under the kiddie tax rules, a portion of a child's unearned income is taxed at the parent's ordinary income tax rates to prevent families from avoiding taxes by taking advantage of the child's lower income tax rate. Unearned income includes taxable income that the child has not earned through some type of work. A child's first $1,350 in unearned income is tax-free, the second $1,350 is taxed at the child's income tax rate and unearned income in excess of $2,700 is taxed at the parent's income tax rate if the kiddie tax applies. The kiddie tax only applies if (1) the child is age 17 or younger, (2) the child is age 18 at the end of the year and is not financially independent (meaning that their earned income did not cover more than 50% of their living expenses) or (3) the child is aged 19 to 23, is a full-time student at the end of the year and not financially independent. All of this means that if the Trump account beneficiary executes a taxable transaction with Trump account funds, it's possible that the amounts involved will be taxed at the parent's higher income tax rate. For more information on the kiddie tax rules, visit Tax Facts Online. Read More: Link to Q8601.