“Kiddies” To Be Taxed More
By Michael D. Koppel, CPA/PFS
Gray, Gray & Gray, LLP
In May, 2007, Congress passed and President Bush signed the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA) as part of the legislation to finance the wars in Iraq and Afghanistan. SBWOTA extends and or enhances many business deductions and credits. However, Congress had to find a way to pay for these changes. One of the ways used to raise revenues was to significantly increase the number of “children” that will be subject to the so-called “Kiddie Tax.”
The “Kiddie Tax” was first enacted in 1986. It is designed to tax substantially all unearned income accumulated by a child under 14 years of age as if it were the parents’ income. The idea was to stop parents from being able to transfer investments to their children, thus allowing them to be taxed at a lower rate. The age of 14 stayed in place until 2005 when the “Kiddie Tax” age was changed to under 18.
Now SBWOTA has increased the “Kiddie Tax” age to the later of under 19, or full-time students under 24. This change begins in 2008. The tax will not apply if a child over the age of 17 provides more than half or his or her own support through earned income.
The change in the “Kiddie Tax” rules are designed to close a loophole. Parents or grandparents would “gift” appreciated stock to their children or grandchildren. (Depending of the value of the shares gifted there may be gift tax consequences.) The “kiddies” would then sell the shares.
In the past, a child over age 17 would not be subject to the “Kiddie Tax” and, as long as they had taxable income of less than $30,000, the long term capital gain would be taxed at a federal tax rate of 5% rather than the 15% rate of the parent. This could result in tax savings of approximately $3,000. The “loophole” was scheduled to get even better in 2008 when the “kiddie’s” long tern capital gain rate would drop to zero, resulting in a federal tax savings of approximately $4,500.
These changes in the “Kiddie Tax” mean that parents need to assess if they should take advantage of the loophole this year before it closes.
As with all areas of tax the planning and complying with the “Kiddie Tax” requires the guidance of qualified professionals. Please contact our office to assist you in this area.
Reprinted with permission from CPAmerica.