Kiddie Tax and IRA Accounts

Estate Planning Attorney | While many grandparents are interested in leaving an IRA account to a grandchild, they should be aware of some tax penalties and rules that still apply to the grandchildren. Many people will assume that a minor will have to pay less taxes than the parents, but this is not always the case. An estate planning attorney will advise on how to handle this, and prepare you for the taxation of your child or grandchild’s investment income.
It’s important to know that the lowered income tax rate does not apply to all unearned income. This “kiddie tax” was enacted to prevent parents from shifting the income onto the children to receive a lesser tax rate. As a result, the first $1,050 is taxed at the parent’s rate, which could be as high as 35 percent depending on certain factors.
This kiddie tax is applicable for individuals under the age of 18 who have an earned income that is less than half their support for the year. In some unique situations, the kiddie tax law can apply until an individual is 24, depending on their income and level of support. Another caveat is that if a grandparent leaves an IRA to a grandkid, the grandkid must take minimum distributions with the first year of the grandparent’s death.
An estate planning attorney can recommend that instead of leaving an IRA, they could leave a Roth IRA since distributions are tax-free. Additionally, it’s better to leave investments that could appreciate like stocks or bonds or unimproved real estate. These items are tax-free income, and have a lower return rate than a taxable investment.
If you are looking to avoid a kiddie tax, or what to discuss how the most efficient ways to leave your grandkids financial support, contact an estate planning attorney at The Law Office of Michelangelo Mortellaro to learn more.