Article Highlights: Appropriations Act of 2020 Children’s Tax-Filing Requirements Two Methods for 2018 and 2019 Amendment Possibility for a Dependent Child Standard Deduction Wages Self-employment Income Investment Income Parents’ Election Who Is Responsible for Filing? Retirement Savings Opportunity Signing the Return On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will, as a whole, impact a large portion of U.S. taxpayers. This article is one of a series of articles dealing with those changes and how they may affect you.Your dependent child who worked during the year or had investment income, such as interest or dividends, may be required to file a tax return, depending upon the type and amount of the income. Years ago, to prevent parents from putting their investments in their children’s names to avoid or significantly reduce the tax on their investment income, Congress passed what is commonly referred to as the kiddie tax. The kiddie tax taxes children’s income in excess of a small allowance at the parent’s top tax rate. More recently, as part of the 2017 tax reform, Congress modified the kiddie tax structure, so that the children’s investment income in excess of the small allowance ($2,200 for 2019) is taxed at the fiduciary tax rates*, which can very quickly reach the maximum tax rate. On the other hand, the tax reform virtually doubled the standard deduction (it is $12,200 for 2019 for someone using the single filing status), providing children with substantial tax-free income from working. That change to how the kiddie tax is figured created an unintentional tax increase for survivors of service members and first responders who died in the line of duty. As a result, Congress has decided to scrap the new method, which used fiduciary rates, and to revert to the original kiddie tax computation, beginning in 2020, resulting in the child’s net unearned income being taxed at the parents’ tax rate, if it’s higher than the child’s tax rate. Amended Return Possibility – Taxpayers can choose whichever method provides the lowest tax for 2018 and 2019 and can amend the 2018 return if it provides a better outcome. This will especially benefit taxpayers with substantial unearned income. Unearned income generally includes investment income such as taxable interest, dividends (including capital gain distributions), and capital gains, as well as rents, royalties, pension income, survivor benefits, the taxable part of Social Security benefits, taxable scholarship and fellowship grants not reported on Form W-2, and other income types. A dependent child is defined as being either under the age of 19 during the tax year or under 24 if he/she is a full-time student. Also, to be a dependent, the child needs to live with you for more than half of the year (unless he/she is away due to a temporary absence that includes living away from home while attending school), and although there are no support requirements, the child cannot be self-supporting. When considering whether the child is self-supporting, don’t confuse support for the child with the child’s income. Income that is saved is not used for support. How a Child’s Income Is Taxed Wages – When children only have earned income (wages), they file their own tax return and can claim the standard deduction. Thus, only their earnings in excess of the standard deduction, which is $12,200 for 2019, is subject to income tax. As a result, if their earnings are less than the standard deduction, they need not file a tax return unless it would need to be filed for them to claim a refund of withheld income taxes. Self-Employed Income – If your child is an entrepreneur and has net income from self-employment, then in addition to income tax, he/she may owe self-employment tax. Self-employment tax is only assessed if the net self-employment income is above $433. Thus, if your child’s self-employment net income is more than $433, he/she must file a return, even if the total income is less than the standard deduction. Investment Income – If your children only have investment income, such as interest and dividends, their standard deduction for 2019 will be $1,100, but for the kiddie tax computation, any investment income in excess of $2,200 (the special allowance previously mentioned in this article) will be taxed, either at fiduciary rates – which start at 10% and reach 37% when the investment income in excess of the special allowance reaches $12,750 (the TCJA method) – or at their parents’ marginal tax rate (the pre-TCJA method that Congress brought back). Earned Income and Investment Income – This is the most complicated because the standard deduction is the greater of $1,100 or the child’s earned income plus $350, but it should not exceed the $12,200 standard deduction for a single individual, while the special allowance for the kiddie tax is $2,200. Generally, in this situation and using the TCJA method, investment income over $350 will be taxed at fiduciary rates, and earned income over the remaining standard deduction will be taxed at the regular single tax rates. Otherwise, if the TCJA method isn’t used, the child’s tax will be the greater of the tax on all of the child’s income or the sum of the tax on the child’s earned income plus the child’s share of the allocable parent tax. The TCJA method is only available for 2018 and 2019.