“Kiddie Tax” and other Changes in the Tax Cuts and Jobs Act

By Douglas McAlpine, Esq., CPA

The Tax Cuts and Jobs Act made headlines for major changes to corporate income taxes and the new small business deduction.  This article highlights some changes which will have an impact on many tax returns but did not receive much publicity.

• The “kiddie tax” has been changed.  Through 2017, the passive income of a minor child was taxed at the parents’ rates through an importing of the parents information into the child’s return where the tax was calculated on Form 8615.  This blunted the ability to move investment income through custodial accounts to children who would otherwise have a lower tax bracket.  Beginning in 2018, the child’s tax return will be taxed at the rates used for trusts. Since trusts reach the top income tax bracket at $12,500 of taxable income, this change makes the investment management of these accounts even more important than in the past.  Emphasis on long-term capital gains and qualified dividends continues to be important to take advantage of the favorable rates which apply to those two categories of income.  Taxable interest income and short-term capital gains do not benefit from these favorable rates.
• With the increased standard deduction to $12,000 for single filers and $24,000 for married filing jointly and the limitation on state and local taxes at $10,000, it becomes more likely that older filers who have no mortgage interest will be claiming the standard deduction. In that case, taxpayer’s who have reached age 70.5 should consider satisfying their charitable pledges from their IRA’s.  This is not a new idea but it has been made permanent by the new law so it will no longer be subject to annual extenders legislation which has created year-end issues in the past.  The annual limit for contributions from your IRA is $100,000 and these contributions count toward satisfying your Required Minimum Distribution for the year.
• The Roth Conversion rules have changed putting limitations on your ability to convert a taxable IRA to a Roth. Previously, you had the ability to undo the conversion by re-characterizing the transfer back to the taxable IRA before the tax return filing due date including extensions.  You could convert in 2017 and then wait until as long as the October 2018 extension deadline to determine whether it made sense from a tax standpoint.  For example, if the value of the portfolio converted went down, you would still owe 2017 taxes on the value at conversion.  In that case, you would undo the conversion and file the appropriate forms with your 2017 return to remove the distribution from taxation.  Under the new law, conversion from a taxable IRA to a Roth IRA is a one-way street and you cannot undo the transfer.
• Section 1031 like-kind exchanges have been limited to real property.
• For agreements dated after 2018, alimony is no longer deductible by the payor and cannot be included in the income of the recipient. This presents a complicated issue for taxpayers whose divorce is pending in 2018.  Timing of the final decree will become vital to the negotiations about the amount of alimony and will create the need for more intense tax advice to members of the domestic relations bar and their clients.

These are just a few of the many changes in the new act.  If you have questions about these issues or any other legal or tax matter, please give us a call at 404-255-7400 or email us at info@hoffmanestatelaw.com.