Kiddie Taxes

GIMME A TAX BREAK

KIDDIE TAXES

Some of you are in a position to transfer income to your children and grandchildren. In some cases you may own a business and be able to hire the kids. It is important in those cases that the compensation paid is reasonable in relation to the work performed.

That is referred to as “EARNED” income and is not affected by the kiddie tax rules. The kiddie tax rules apply to the interest, dividends and capital gains which younger people make from the investments which their parents and grandparents have transferred to them.

For many years the tax only applied to youngsters 13 or younger. However, the rules have been changed so that any child under the age of 18, who is not a college student, and those in college up to age 23, are now governed by this.

If the child receives in excess of $1,700 in any year from interest, dividends or capital gain distributions, they must use their parents highest tax bracket to determine their tax liability in any given year. Or they can have the parent report the income on their returns at the highest tax level.

As a result of this, many smart parents and grandparents who were funding their kid’s education by shifting income to a lower tax bracket are now going to come up with another approach.

Even though this change in the law is making it harder to shift income to younger family members in lower tax brackets, there are still a lot of ways to minimize the overall family tax bracket and help the youngsters.