Volume 5 Issue 2007

Until they enter the work force full-time, most children who have any taxable income have only limited amounts. Limited income translates to a low tax bracket. So, without rules to prevent it, parents interested in cutting the income taxes payable on their own investment income could simply put some of their investments in their kids’ names.

Congress didn’t want that to happen so, years ago, it put “kiddie tax” rules in place that curtail opportunities for parent-to-child income shifting. The law became stricter last year, and now the unearned income of a child under age 18 is taxed at the parents’ rate to the extent it exceeds $1,700.

Starting in 2008, the Small Business and Work Opportunity Tax Act of 2007 extends the kiddie tax to older children who receive the majority of their support from sources other than their own earnings. Under the new law, the tax will also apply to 18-year-olds and full-time students ages 19 through 23 whose earned income does not exceed half of their total annual support. Scholarship money won’t be counted in figuring the total amount paid for a child’s support.

In view of the upcoming change, families may want to review their portfolios. Dependent students who will be turning ages 19 through 23 next year might consider selling appreciated securities in 2007 so that the resulting gains will be taxed at their own rates. Of course, investment sales should also make sense from a non-tax viewpoint.