Article Highlight: Prior Law New Law Earned Income Unearned Income Fiduciary Rates Strategies Years ago, to prevent parents from transferring their investment accounts into their children’s name to avoid taxes, Congress created what is referred to as the kiddie tax. This counteracted the strategy of taking income from the parents’ higher tax bracket and shifting it to their children’s lower tax bracket. The kiddie tax plugged that tax loophole by taxing the child’s unearned income (income not from working) at the parent’s top marginal rate. That has all changed under the new tax reform. Beginning in 2018, children’s tax rates are no longer based upon their parents’ top marginal rates. Congress streamlined the kiddie tax by taxing a child’s unearned income by the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child's tax is unaffected by the parent's tax situation or the unearned income of any siblings, while the earned income is taxed using the single tax rates. Although this will greatly simplify the preparation of a child’s return, there will be losers and winners. One of the big winners will be a child who is employed. Since earned income is taxed at single rates, a working child will benefit from the new higher standard deduction allowing them to make up to $12,000, instead of the previous $6,350 of earned income without any tax. On the other hand, for those with substantial unearned (investment) income, that income will no longer be subject to the parent’s top tax bracket but instead will be taxed at the rates for estates and trusts, which for 2018 hit 37% at a taxable income of $12,500. The losers will be children with substantial investment income, which will be taxed at the trust rates, especially children whose parents are in a low tax bracket. Under the old law, a child’s unearned income was taxed at the parents’ top tax bracket, which now may be lower than the fiduciary tax rates. The kiddie tax applies to children under the age of 18, a child age 18 at the end of the year with earned income less than one half the cost of their support, and full-time students between the ages of 18 and 24, also with earned income less than one half the cost of their support.