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Make the Most of the New Tax Law by Planning Now

January 04, 2018

An early start on tax planning is always good, but this year it is essential. The Tax Cuts and Jobs Act fully rewrites the tax code effective January 1, 2018. To get the most benefit from the changes, while avoiding mistakes under them, update your tax and financial strategies right away. Here are example areas where action at the start of the year can make a full-year difference:

Kiddie Tax
In 2018, the rate of this tax, which applies to unearned income of children under age 19 (or 24 if a full-time student) may go up– or down. Before 2018, the kiddie tax applied the tax rate paid by the child's parents, but under the new law it applies the tax rates paid by trusts and estates.
Trust tax rates rise fast to reach the new top 37% tax bracket at only $12,500 of income. Married couples don't pay that much until income exceeds $600,000, so now a child may owe a higher tax rate than the child's parents. But trust tax rates start at only 10%, which may be lower than the rate of a child's parents, resulting in a kiddie tax rate reduction.
A child can receive up to $4,650 of unearned income before exceeding the 10% trust rate: $2,100 not subject to kiddie tax plus another $2,550 at the 10% rate. When earning 4% interest, investments may total as much as $116,250 before exceeding the trust 10% rate. (If the child also has earned income it will affect this calculation.)
If the new law will increase your family's kiddie tax rate, you may want to reduce a child's currently taxable income, perhaps by investing for long-term gains. But if it will reduce the rate, you may wish to take gains. You can't know before examining your situation, so do it soon.
One item that can run up kiddie tax liability is receiving taxable distributions from an inherited traditional IRA – a reason to instead fund potential IRA inheritances with a tax-free Roth IRA. View More