Posted on May 15, 2006 at 07:46:22:
When children have investment income, even while being claimed as dependents, they can take in up to $850 tax free, using the standard deduction; further unearned income, such as dividends or capital gains, can be taxed at rates as low as 5 percent.
A child under 14 is subject to the “kiddie tax.” After that first $1,700, tax will be owed at the parents’ rate. After 14, the child turns into a single taxpayer who will be taxed at 10 to 15 percent on income up to $30,650 – a better rate than Mom and Dad pay.
That’s why many parents transfer assets to their children, usually under the Uniform Transfers to Minors Act (UTMA). These custodial accounts are easiest to set up and maintain. Anyone can transfer up to $12,000 a year ($24,000 if giving together) to each child, trimming taxes as they give. Once a child is over 14, it may make sense to gift an asset to be sold. Though the child keeps the same basis in the asset, the gain is taxed at a lower rate.