Under the child tax, a child is taxed at the normal rates on earned income plus unearned income up to the threshold. Thus, for 2020, the normal tax rates will apply to a child`s earned income plus $2,200 in unearned income. A child`s unearned net income (above the amount taxed at the child`s tax rate) is taxed to the child at the parents` tax rate (assuming that this rate is higher than the child`s rate). Child tax covers the unearned income a child receives: interest, dividends, capital gains, rents and royalties. Salaries or wages earned by the child are not subject to child tax. In particular, the child`s tax on the child`s net income is the amount of the child`s share of the “attributable parental tax”. For this purpose, the attributable parental tax is the amount by which the tax that would be levied on the parents` taxable income if that income included the net income of all children of the parents subject to child tax, compared to the tax that would be levied on the parents` taxable income independently of the child tax. The child`s share is the amount of tax that has the same ratio to the total attributable parental tax as the child`s net unearned income relative to the total unearned income of all children of parents subject to child tax. As under the previous legislation, child tax applies to a child`s unearned net income if the child is under 19 years of age or if a full-time student is under 24 years of age, has at least one living parent, has unearned income above a threshold ($2,200 for 2020) and does not file a joint return with a spouse for the year. In the case of a child over 17 years of age, child tax only applies if the child`s professional income does not exceed half of his or her maintenance.
The TCJA eliminated the two-part tax calculation for children subject to child tax. Since parental tax rates were no longer relevant, the complexity of determining which tax rate should be used for divorced parents or married parents who had filed separately disappeared. In addition, the attributable parental tax was no longer part of the TCJA child tax, further simplifying the tax calculation for children whose siblings were also subject to tax. Under the TCJA, the child tax subject to child tax was determined in one complex calculation. These changes have resulted in higher taxes in many cases, as the lower tax brackets for estate and trust income are much narrower than those for individuals. We call this tax the TCJA Child Tax. Child tax is levied on persons under a certain age (18 years of age or younger and full-time students aged 19 to 24) whose investment income and unearned income exceeds an annual threshold. If your family paid child tax in previous years, you may be eligible for a refund.
If taxpayers amend their 2018 tax return, the non-TCJA child tax can be calculated using the amended instructions for Form 8615, 2018. Taxpayers can file Form 1040-X, amended U.S. Personal Income Tax Return for 2018 with the required election return. Since estate and trust tax rates increase more than personal income tax rates, this change could result in higher child taxes for some families. Child tax is levied on individuals who are 18 years of age or younger and whose investment income and unearned income exceed an annual threshold. The IRS taxes all income that exceeds the specified threshold at the parent company`s tax rate. With the Tax Cuts and Jobs Act of 2017, the child tax was temporarily changed to use the tax rates that apply to estates and trusts, rather than the tax rate of the child`s parents. Adult children who turn 19 at the end of the tax year — or 25 in the case of full-time dependent students — are not subject to child tax. To combat the widows` tax, the Gold Star spouses intentionally transferred STR benefits to surviving children in order to receive all benefits paid by the VA. Since these children did not earn these payments in exchange for their work, STR benefits constituted unearned income for child tax purposes and were taxed at rates up to 37% lower than the TCJA child tax.
This was in stark contrast to the non-TCJA tax on these benefits, which was levied at the Gold Star spouse`s marginal tax rate. Thus, congressional efforts to simplify the child tax through the TCJA have led to these unintended consequences for Gold Star families. While the impact of the TCJA Child Tax on Gold Star families has been widely publicized, other taxpayers affected have been Alaska residents who receive dividends from the Alaska Permanent Fund; Indians receiving tribal distributions; and low-income students who receive scholarships outside of tuition. Unfavorable media coverage of these consequences motivated Congress to change the child tax again.