Major changes to the “kiddie tax” could significantly increase the tax liability of assets placed in special needs trusts if the trust’s beneficiary is a minor and the income the trust earns is high enough.
Congress enacted the so-called “kiddie tax” in 1986 to deter wealthy families from “income splitting” -- shifting some of their assets to other relatives, such as their children, so income on the assets can be taxed at a lower rate. The kiddie tax provision of the Internal Revenue Code taxes unearned income from minors differently than other unearned income. Unearned income generally refers to non-wage income, such as income from capital gains, dividends, or assets placed in a trust, including a special needs trust (SNT) for children with disabilities.
Up until now, the Internal Revenue Services (IRS) automatically taxed all unearned income from children above $2,100 in the same tax bracket applicable to their parents’ income. Under the new rules, enacted as part of the Tax Cuts and Jobs Act of 2017, the IRS instead taxes unearned income above this threshold at the greatly compressed tax rates for trusts.
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