Children’s Impact Under Tax Reform
With the recent overhaul of the US tax system, it comes as no surprise that many are still trying to decipher how they are impacted by the changes. While media pundits have been quick to highlight the most dramatic changes (i.e. mortgage interest limitations, state tax deduction limits, lowered corporate taxes), few have touched on how this reform will impact individuals/families with children under 18 years old. To summarize these changes:
Enhanced Child Credit:
- Expanded from $1,000 per qualifying child to $2,000
- New $500 credit is available for qualifying dependents not eligible for the full $2,000 credit (this is intended to make up for taxpayers no longer being able to claim their dependent parents as personal exemptions).
- Most notable point for LFA clients: Credits begin to phase out once income exceeds $400k for married couples, $200k for all other taxpayers. This is an increase from the former phase-outs of $110k for married couples, $55k for all others. Many more LFA clients will qualify for this credit.
- 529 savings plans have been a tax-efficient way to save for future education expenses on behalf of a designated beneficiary, such as a child or grandchild. Before tax reform, these accounts were strictly reserved for college and post-secondary training. Now, up to $10,000/year may be withdrawn from these accounts to cover the costs of K-12 expenses (includes expenses for public, private, and religious schools).
- Qualified 529 expenses remain pretty much the same as they were previous to tax reform: Tuition, room and board, technology (computers/printers/laptops/software), books and supplies, certain homeschooling expenses (new).
- Prior to tax reform, the tax code allowed for parents to transfer appreciated securities to their children and for their children to sell the securities and recognize the gain (at lower rates than if the parent had exercised). Transfers of income like this are still allowed and slightly more favorable…as long as the strategy keeps capital gains, interest, and dividends below the $2,600 – 0% tax rate.
- Earned income, however is subject to higher rates at lower income levels.
- Previous kiddie tax rules stated that, at worst, the child’s income would be taxed at the parents’ tax rate. Now, children’s ordinary income and/or capital gains are taxed at the same rates as trusts, listed below:
As with all financial planning topics, feel free to contact us to discuss how new tax law changes affect you!