2017 TCJA and Preparing Dependents’ Tax Returns

There are many things to consider in the preparation of dependent children’s tax returns. Sometimes issues arise that make the preparation more complicated. Under the Tax Cuts and Job Act of 2017 (TCJA), there are some changes to the tax filings of a child’s return which need to be considered. First a determination must be made as to whether the dependent is required to file federal and state tax returns. Federal filing requirements consider these questions:

1. Did the child have more than $1,050 of unearned income or more than $12,000 of earned income?
2. If earned income is less than $12,000, is then child’s gross income greater than his/her earned income plus $350? This gross income test is a change under TCJA, which raised the single filer standard deduction to $12,000 and eliminated personal exemptions.

The determination of state filing requirements is more complicated because each state has its own filing threshold. A dependent who is a full-time college student could potentially be earning income in their home state, the state where they attend school, or a different state where they held a summer job or internship. If there is state income with no associated state tax withholding, there is a good chance the dependent did not hit the filing threshold of income in that state and would not be required to file a return. This would have to be verified, of course.

In most instances where there is state tax withholding, even if the state filing threshold was not met, a tax return can be filed to obtain a refund for the dependent. Some states, such as Connecticut, require a tax return to be filed if any tax at all is withheld. Dependents are still residents of their parents’ home state while they are away at school and would be nonresident filers in the other various states where they have earned income.

The TCJA also includes a new dependent credit available to taxpayers who claim dependents above age 16 and who do not qualify for the regular Child Tax Credit. This new $500 credit is available for married couples filing jointly with adjusted gross income below $400,000 and adjusted gross income below $200,000 for all other filers. This will be a factor to consider when determining whether to allow full-time college=age dependents to utilize nonrefundable education credits against tax liabilities they may have. If the child utilizes an education credit, the parents may not claim them as dependents on their tax return. Also under the TCJA, the “Kiddie Tax” is eliminated. Prior to the new law, a dependent under age 24 who had unearned income greater than $2,100 was subject to being taxed at his or her parents’ tax rate for the income in excess of $2,100. If their parents were on extension, the dependent also had to be put on extension in order for their parents return to be finalized. Now, the dependent’s earned income is taxed at the rates of single filers and unearned income is taxed according to the tax brackets for trusts and estates — 10% up to $2,550, 24% up to $9,150, 35% up to $12,500, and 37% over $12,500. The good news is that children no longer have to wait for their parents’ return to be completed before they can file their own. The bad news is the tax brackets for trusts and estates are much more compressed, and taxpayers become subject to higher brackets with less income.

The 2017 Tax Cuts and Jobs Act had many impacts on individual tax filings that went into effect for the 2018 tax filing year. Should you have any questions about the new rules and how they affect your dependents, please contact your Marcum tax advisor.