The Tax Cuts and Jobs Act (TCJA) has a number of provisions affecting parents in 2018. The 529 education plans, kiddie tax and child tax credits all underwent major changes, some of which are beneficial and some of which require careful planning.
As summer comes to a close and kids go back to school, parents of elementary and secondary school age children have been given a new avenue for investing in their children’s education. The 529 plan, which has traditionally been a tool for funding college education, has now been opened up for elementary and secondary school tuition. The schools can be public, private or religious. The funds from the 529 plan can be used to pay tuition, books, supplies and required equipment. Reasonable room and board also is an eligible expense, but those expenses are likely geared more toward those students going to college. The limit per tax year that can be used is $10,000 for elementary and secondary school expenses and unlimited for college expenses. There is still a 10 percent additional tax—on top of the regular tax, if a nonqualified withdrawal is made—just like with college funds. Fall 2018 provides an opportunity to use the full $10,000 if a taxpayer hasn’t already taken out the $10,000 earlier in the year. Also remember that the annual exclusion for gifts in 2018 has been increased to $15,000 per person, so family members have an increased opportunity to fund these plans. Be sure to check the rules in your particular state—many permit deductions or credits for state tax calculations for amounts contributed to certain 529 plans.
The kiddie tax has been around for a number of years. Children up to age 18 and full-time students ages 19 to 23 with unearned income exceeding $2,100 have paid tax at their parents’ rates on the excess above $2,100. For some families, that means kids are paying on most of their unearned income at or near the top tax rate. For others, the rates have been lower depending on the parents’ income. Beginning in 2018, there’s a modification to the formula for computing the tax. The income will now be taxed at the trust rate schedule versus using the parents’ top rate. This could have a significant effect on families who weren’t at the top rate, but whose children do have some significant unearned income. The trust brackets for 2018 are as follows:
This change in bracket structure will tax much of the child’s income for middle-income families at the top rates, which could significantly increase tax for many of them.
Child tax credits are now going to be available for more families, and they’ve been increased for 2018. Previously, child credits were up to $1,000 per child under age 17. They began phasing out at $110,000 for married filers, so many families weren’t able to take them. Beginning in 2018, the credit has been increased to $2,000 per child and the phaseout for married taxpayers begins at $400,000. The refundable piece of these credits has been increased to $1,400 per qualifying child.
As the new school year approaches, and to follow the end of the year, parents should consider gifting to their children (while understanding the kiddie tax consequences it creates), making use of opportunities to fund their elementary and secondary education and taking advantage of increased child tax credits to possibly help fund some of these opportunities. Be sure to check your state for conformity with the new provisions and for any potential deductions or credits that may be available.
If you have questions about the TCJA’s tax effect on your children, visit BKD’s Tax Reform Resource Center or contact Mitch or your trusted BKD tax advisor.