There were major revisions to the “Kiddie Tax” in the last tax reform package. It is worthwhile to look at everything “from scratch” on the topic beginning with the 2018 tax year (this year).
The Wall Street Journal had a recent article titled “The Winners and Losers from the new ‘Kiddie Tax'” that summarized the new tax law.
Per the article – “what is the Kiddie Tax”
The Kiddie Tax is a special levy on a child’s “unearned” income above $2,100. It typically falls on investment income such as dividends, interest and capital gains, and it doesn’t apply to a youngster’s earned income from mowing lawns or designing websites.
Today, the Kiddie Tax applies to nearly all children under 18 and many who are under 24, if they are full-time students and aren’t self-supporting.
Per the article – “What are the rates” (for 2018):
Ordinary Income (including short-term gains)
Up to $2,550 10%
$2,551 – $9,150 24%
$9,151 – $12,500 35%
$12,501 and above 37%
Long-term capital gains and qualified dividends
0 to $2,600 – 0%
$2,601 – $12,700 – 15%
$12,701 and above 20%
What Does This Mean?
There are comparisons to the old tax tables and discussions of who pays more or less, but that is more politics than immediately relevant. This is the new tax model, and to the extent that it impacts your investment results, you should be aware of it.
From our purposes, this means that you can shield up to $2600 in long term gains and qualified dividends at a tax rate of zero. This is positive, given the size of our portfolios. Even the largest portfolios typically don’t have more than $1000 / year in dividends, and since gains net against losses and cancel each other out, you wouldn’t trigger gains enough to move into a higher tax bracket unless we made very significant sales (i.e. 1/3 or more of a portfolio) or transitioned an individual stock portfolio into an ETF portfolio like we did with Portfolio 2 in 2016 (this may come for portfolio 3 at some point in the future).
This tax methodology is also significantly simpler than the old model, since kids were often taxed at their parents’ rate in some situations. This is no longer the case under the new tax law.