Archives for January 2019

What is the Kiddie Tax?

In 1986 the lawmakers added the Kiddie Tax to the tax code in order to prevent high wealth parents from shifting income-producing investment assets to their children who were in lower tax brackets.

How Did The Kiddie Tax Work in Prior Years?

In prior years, the law taxed all unearned income from a child in excess of a predetermined amount ($2,100 for 2017). You had to add the unearned income of your child to your taxable income to determine the tax rate. Then you used this tax rate on your child’s return to calculate the tax owed. This applied to all children under age 19 (or 24 if a full-time student and the parents provide more than half support).

What is Unearned Income?

Generally, unearned income is income from all sources not considered earned income. Earned income comes from employment or self-employed business activities. The most common form of unearned income is from dividends or interest from investments. For example, your child may have unearned income from dividends on stocks that you purchased in the child’s name.

How Does The New Kiddie Tax Work?

Beginning with tax year 2018, The Tax Cuts and Jobs Act modified the Kiddie Tax in two main ways. First, you don’t add your child’s unearned income to your income to determine the tax rate. Second, you use the rates that apply to trusts and estates.

You can find more information, including the tax rate tables in the instructions for form 8615, Tax for Certain Children Who
Have Unearned Income.

These changes will benefit most children who have modest unearned income. For those in multi-sibling households the benefits are even greater. For example, in prior years all of the siblings’ unearned income would be aggregated to the parents return to determine the tax rate. All of the siblings would be subject to this tax rate irrespective of their actual amount of unearned income. Now, each child will be subject to the tax rate applicable only to his or her unearned income.

While most will benefit from these changes, for some with high amounts of unearned income their tax bill may end up being higher. Given this, it is important to discuss your tax situation and strategy with a qualified tax professional and we are here to help. Give us a call!

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016, the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or non-qualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018 and 2019).

These are just some of the potential tax issues that may arise. Consult your tax adviser regarding your specific situation.

Connect with us, right now, for additional tax advice and planning.