Tuesday, March 25, 2014

IRS: Obamacare Raised Taxes for Some Children

    When the Affordable Care Act was passed in 2010, one provision was a new 3.8% Net Investment Tax effective in 2013.  Although the tax will generally hit high-end taxpayers (threshold is $250,000 for married and $200,000 for single,) because of the way many parents choose to report their children's investment income, the tax will hit those children as well.
    While the basic application of this tax has been known since passage, the specific effects have become more apparent recently as the IRS issued its final rules, forms, and instructions.  Last Friday, the IRS published a tip on its website entitled "Tax Rules for Children with Investment Income." Included is this note regarding the Net Investment Tax [emphasis added]:
Starting in 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. NIIT is a 3.8% tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount...
    The new tax paid on children's income will be part of a so-called "kiddie tax" that stems from 1980s tax reform when Congress sought to recover taxes that were being lost on income from assets transferred from parents to children ("child" is defined as under age 19, or under age 24 if a full-time student.)  Investment income over $2,000 is taxed at the parents' highest rate instead of the rate used for regular income for the child.  And if the parents' income exceeds the NIIT threshold, the child's investment income is also subject to the additional 3.8% tax.
    The above scenario represents the simplest application of the regulations; individual situations can be more complex and will vary from person to person.  But according to a tax accountant interviewed by THE WEEKLY STANDARD for this story, "The bottom line: you will get a lot of upper-middle-class taxpayers paying an additional NIIT if they have shifted enough income-producing assets to their children via gift."  So while the tax was aimed at high-income taxpayers, it turns out Obamacare will hit some low age taxpayers as well.

Note: A version of this post first appeared at The Weekly Standard.

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