Insights: Article

Tribal Gaming Revenue Distributions Subject to the 'Kiddie Tax'

August 07, 2017

Congress enacted the so-called "Kiddie Tax" in 1986 to keep wealthy parents from saving taxes by way of gifting income producing property to children in lower brackets. Recently released ILM 201729001, a new IRS legal memo, shows how this rule can apply in situations having nothing to do with family tax planning.

Details of the Tax
The Kiddie Tax, as designed under Internal Revenue Code Sec. 1(g), taxes "unearned" income of children at their parent's tax rate if it exceeds a threshold amount, which is $2,100 in 2017. Unearned income below that amount is taxed at the child's rate. This tax is computed on Form 8615

While dividends and interest are the classic sources of unearned income, the Kiddie Tax has a broader reach, as ILM 201729001 illustrates. The memo involves payments made under the Indian Gaming Regulatory Act, which allows tribes to distribute gambling revenues per capita to members, including children. These distributions aren't legally interest or dividends. But are they "unearned?"

Defining 'Unearned'
The Kiddie Tax rules get their definition of "unearned" income from Section 911, the provision that allows taxpayers living abroad to exclude income "earned" overseas from U.S. income tax. It says, any income that isn't "earned" under Sec. 911(d)(2) is unearned. 

To be "earned" under Sec. 911, according to the IRS legal memo, income has to be "wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered." The tribal distributions fail to meet this rule, according to the memo (emphasis added):

A member of Tribe who is a child (as defined is § 1(g)(2)) does not receive the per capita payments of gaming revenues of $x per year under Tribe's revenue allocation plan as compensation for personal services rendered or actually rendered under § 911(d)(2)(A) or (B). Rather, a member of Tribe who is a child receives the per capita payment of $x per year due to his or her status as a member of Tribe, without regard to whether he or she renders personal services

Therefore, Tribe's per capita payments of Tribe's gaming revenues made pursuant to its revenue allocation plan paid to or on behalf of a child (as defined in § 1(g)(2)) who is a member of Tribe are not earned income of that child 

A Reminder
The IRS legal memo reminds us that children can pay taxes at their parents' tax rates on a lot more items of unearned income than just dividends or interest. In addition to the tribal payments covered in the memo, "unearned" income can also include, among other things, payments made from a deceased parent's retirement account to a child. It's also important to note that if the child is a full-time student, the Kiddie Tax can apply until age 24. The Kiddie Tax cannot be avoided by the parent simply failing to claim the child as a dependent, as the tax applies as long as the child's "earned" income is less than one-half of the child's total "support."

Contact an Eide Bailly tax professional to learn more about income tax planning for children and other dependents.

Latest Insights

November 19, 2018
Article
Have you been paying attention to the sales tax changes and increased compliance obligations as a result of the recent SCOTUS Wayfair decision?
November 16, 2018
Video
If your business sells or operates in more than one state, it’s important to understand the concept of nexus. Depending on how you’re earning revenue, having nexus could impose a variety of taxes, which vary state to state. Learn more in our…
November 15, 2018
Article
Until recently, many businesses weren’t overly concerned about sales tax. They knew they needed to collect and remit in the state in which they resided, but beyond that, their compliance burden was limited.
November 12, 2018
Article
This insight explores what dealerships can expect from the proposed section 199A regulations under tax reform.
November 8, 2018
Article
Are you a business taxpayer with annual gross receipts of $25 Million or less? If so, you may be eligible to take advantage of new Small Taxpayer Safe Harbors that could generate significant tax savings and simplify your tax returns in future years!
November 8, 2018
Article
Considered the most significant tax code overhaul in over three decades, the Tax Cuts and Jobs Act passed in 2017 includes provisions affecting both individuals and businesses.
November 7, 2018
Recorded Webinar
State and local sales tax compliance is always evolving, making it important to stay up-to-date on changes affecting your tax liability and responsibilities. This session will cover what you need to know regarding the recently enacted state and…
November 7, 2018
Article
“Why is my portfolio underperforming the market?” This question may be on your mind.
November 5, 2018
Article
Identify your implementation methodology. There are four practical expedients available. We'll explore each option.