This is the second and final post on the effects of the Tax Cut and Jobs Act (TCJA) on divorce settlements. The previous post examined changes to alimony or spousal maintenance or support, the elimination of the individual mandate under the Affordable Care Act (ACA), and the doubling of the child tax credit and expansion to include adjusted gross incomes under $200,000 for individuals and $400,000 for married couples. This post will examine the so-called “kiddie tax” and how those changes impact divorce settlements.

But first, a disclaimer. The Giro Law Firm does not provide tax, legal, or accounting advice on this blog. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. You can also call us at (201) 690-1642 or request an appointment online to schedule a review of your divorce settlement.

“Kiddie” Tax Planning Technique

A popular tax planning technique is to transfer investments or other income-producing assets to family members in lower tax brackets. This is done to take advantage of the other family members’ lower tax rates. The “kiddie” tax makes the use of the technique difficult. The “kiddie” tax generally applies to children age 18 or younger, as well as to full-time students age 19 to 23 (with some exceptions).

Under pre-TCJA law, all but a small portion of a child’s unearned income is taxed at the parent’s marginal rate (if higher). The income-shifting technique fails under this rule. The TCJA makes the “kiddie” tax steeper by taxing a child’s unearned income according to the tax brackets used for trusts and estates, which are taxed at the highest marginal rage of 37% for tax year 2018, once taxable income reaches $12,500. The net effect of these changes is that in many cases a child’s unearned income will be taxed at a higher rate than the parent’s income.

529 Savings Plan

For parents with school aged children however, a significant change was made to the 529 savings plans. The plans can not be used to pay school expenses, including tuition and room and board, for primary and secondary schools. Prior to the enactment of the TCJA, only postsecondary or college and advanced degrees could be paid for using a 529 savings plan.

Review the Tax Impact of Your Divorce Settlement

Ask a child custody lawyer in NJ today about the tax consequences of a divorce or modifying an existing divorce agreement to account for the impact of the tax changes on existing agreements. Helping families with their family law, elder law, and estate planning needs in Hackensack, New Jersey, our child custody lawyer in NJ is here for you today. We also assist individuals with Medicaid planning, special needs, probate, and veteran’s aid. To request a consultation with a child custody lawyer in NJ, click here or call (201) 690-1642 today.

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