November/December 2020 Tax Tips

Congress does a 180 on the kiddie tax

The “kiddie tax” was established in 1986 to discourage people from avoiding taxes by shifting income to their children in lower tax brackets. It achieved this goal by imposing tax at the parents’ marginal rate on most of a child’s unearned income, such as interest or dividends from investments. Under the Tax Cuts and Jobs Act (TCJA), however, beginning in 2018 this income was subject to tax at the rates applicable to trusts and estates. Because the highest tax rates for trusts and estates kicked in at low-income levels (between $12,000 and $13,000), this meant that the kiddie tax rate was often higher than the parents’ marginal rate.

In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act restored the pre-TCJA rules. The act also provided that taxpayers may choose between the TCJA and SECURE Act rules for the 2018 and 2019 tax years. If your children paid kiddie tax for those years, it pays to review those returns and amend them if the alternate computation would result in a lower tax bill.

Generally, the kiddie tax applies to children under age 19 (for full-time students, age 24) as of the last day of the tax year. It doesn’t apply to children who are 1) married and file joint returns, or 2) age 18 or older with earned income that exceeds half of their living expenses.

Working remotely? Watch out for double taxation

This year, many people have been working remotely, in some cases in a different state than the one they usually work in. If you’ve been working remotely across state lines, investigate the potential impact on your state tax bill. You may find yourself with two states attempting to tax the same income: the state where your employer is located and the one where you’re residing and working. Many states, but not all, offer credits for taxes paid to other states, so ask your tax advisor about this.

Reporting paid sick and family leave

The Families First Coronavirus Response Act requires employers with fewer than 500 employees to provide paid sick leave or family and medical leave to employees who miss work for specified reasons related to COVID-19. An IRS Notice provides guidance on how employers should report these payments.

According to the notice, employers may report payments on Form W-2, box 14, or in a separate statement. Either way, an employer must separately state the total amount of 1) qualified sick leave wages paid because the employee was quarantined or diagnosed with COVID-19; 2) qualified sick leave wages paid because the employee was caring for a family member; and 3) qualified family leave wages.

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