Do your children have savings accounts or other investments held in their own name? If so, the tax on those investments could change.
That's because of a change in recent tax legislation, which expanded the "kiddie tax" to cover children up to age 18. Previously it applied only up to age 14. And the change is retroactive to the beginning of 2006.
The new rule could limit a common tax-reduction strategy known as income shifting. It also means you should carefully review all savings and other investments held in your child's name to make sure you know how they're being taxed.
The kiddie tax applies to investment earnings such as interest and dividends. It doesn't cover earned income - wages from your kid's summer job, for example.
Here's how it works. The first $850 of your child's investment income is generally free of tax. The next $850 is taxed at the child's own rate. But all unearned income above that amount is taxed at your tax rate, which is usually higher than your child's.
The intent is to limit income shifting. That's the strategy of putting investments in a child's name to take advantage of their lower tax rates. Previously the kiddie tax limited the benefits of income shifting up to age 14. Now it extends the limit to age 18.
Remember, though, income shifting can still produce some tax savings. Up to $1,700 of your child's investment earnings may be taxed at a lower rate than you pay. But also remember that giving assets to your child has nontax implications too.
Please contact our office if you have questions about how the kiddie tax might affect you.
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