Under the Tax Cuts & Jobs Act (TCJA), and beginning in 2018, a child’s tax on unearned income is no longer based upon the parent’s taxable income for federal purposes. However, California has not conformed to that change. So, for 2018 here is how kiddie tax is handled for Federal and California purposes.
FEDERAL:
Unearned income – For children that do not itemize1, unearned income (including capital gains) between $1,050 and $2,100 is taxed at the single rates and unearned income in excess $2,100 is taxed at trust and estate rates.
Earned income – Earned income is taxed at singles rates and enjoys the benefits of the increased standard deduction of $12,000.
Election to report unearned income on parent’s return (Form 8814) – This election is still available where (1) the child is under age 19, or under age 24 if a full-time student, and required to file a return, and (2) the child’s unearned income (specifically only interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends) is $10,499 or less. In that case it may be more beneficial, where the parents are in a tax bracket less than the fiduciary bracket, to use the 8814 option and include the child’s income on their parents’ return. However, the unearned income between $1,050 and $2,100 will be taxed at 10%. This may be more than what the child would have paid if filing his or her own return when the income is from qualified dividends or capital gain distributions, which would possibly be eligible for the 0% capital gains rate.
1 With the demise of the tier 2 itemized deductions and thus investment expenses, and the increased standard deductions, it will be rare for a child to itemize for federal purposes.
CALIFORNIA: California still follows the pre-TCJA regime.
Unearned income – For children that do not itemize, unearned income (including capital gains) between $1,050 and $2,100 is taxed at the single rates and unearned income in excess $2,100 is taxed at the parent’s top tax rates.
Earned income – Earned income is taxed at singles rates and enjoys the benefits of the inflation-adjusted increased standard deduction of $4,401.
Election to report unearned income on parent’s return (Form FTB 3803) – This election is still available where the child’s unearned income is $10,499 or less, and as a result, the child’s unearned income will be taxed at the parent’s marginal rates instead of the child’s single rates if the child files their own return.
The election to report a child’s unearned income on their parent’s return is a separate election for federal and CA.