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Changes to the "Kiddie Tax" in 2006 |
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The kiddie tax rules changed this year, and that could affect your 2006 year-end tax planning. The kiddie tax applies to your child’s unearned income, such as interest, dividends, capital gains, and rents. If this type of income exceeds $1,700 this year, the excess is subject to tax at your highest rate, rather than at your child’s lower rates. Once your child reaches a certain age, the kiddie tax no longer applies. That magic age used to be 14. The 2006 tax law passed in May changed the age threshold to 18, effective for all of 2006. If you made certain moves relying on the age 14 kiddie tax threshold, you may find that you’ll be paying higher taxes on stock sales or other investment income of a child under age 18.
While there’s no way around the kiddie tax if you’ve already sold investments your child owned during 2006, there are strategies you can employ going forward. Here are some possibilities. • Savings bonds. Consider purchasing savings bonds. The interest on bonds held in your child’s name can be deferred until the bonds are cashed - which you would do after your child reaches age 18. If you meet the income restrictions, you might buy the bonds in your name instead. When the proceeds are used to pay for college expenses, the interest is not taxable. • Munis. Tax-free municipal bonds can help minimize the kiddie tax, too, but keep an eye on the alternative minimum tax rules. • College savings plans. Earnings on investments in 529 college plans and Coverdell education savings accounts are tax-free, as are distributions used to pay for college expenses.
You have other options as well, such as hiring your child in your business. Give us a call to discuss the right choice for you. Not every tax-cutting strategy mentioned in this letter is appropriate for everyone, and other options not discussed may be more suitable in your particular situation. To make your 2006 tax-cutting efforts most effective, call now and let’s get together for your tax planning review. We can help you identify the steps you can take to keep your taxes as low as the law allows.
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