Will the change in
the "kiddie tax" affect you?

The "kiddie tax" rules need a new name. These rules govern the taxability of your child's unearned income and currently apply to children under age 18.

But starting in 2008, the kiddie tax will include children under age 19, as well as full-time students under age 24. The change could mean a bigger tax bill for your college student.

How the kiddie tax works.

When your child receives more than a specified amount of net unearned income in a year ($1,700 for 2007), the excess is usually taxed at your top tax rate if it's higher than your child's tax rate. Unearned income is typically defined as income from investments, such as dividends, interest, and capital gains.

The exceptions.

The kiddie tax doesn't come into play if your child is married and files a joint return. In addition, the newly expanded age provision won't apply when your child earns enough income to provide over half of his or her own total annual support.

Planning moves to make.

To save for college without getting hit by the kiddie tax, consider investing in college savings plans such as a Section 529 plan or a Coverdell educational savings account. Both offer tax-free earnings and distributions when the funds are used to pay for school-related expenses.

Hiring your child to work in your family business is another option. Wages are earned income and are taxed at your child's rate, not yours, even if the child is under the kiddie tax age limit.

Please call our office to discuss the effect the expanded rule will have on your gifting and college savings strategies. We can help you minimize the consequences.