Posted on October 26, 2006 at 10:45:06:
This year’s tax law has lengthened the “kiddie tax” period in which much of a youngster’s unearned income is taxed at the parents’ rate. That used to end when the child turned 14; it now extends to age 18. After that, the child is taxed like anyone else.
Basics: for 2006, $850 worth of investment income is untaxed; the next $850 is taxed at the child’s rate – 10 percent for interest or short-term gains, 5 percent on dividends or long-term gains. Over that any unearned income is taxed at the parents’ top rate.
Income shifting to youngsters doesn’t look as good as it did, nor do custodial accounts. It may be advisable to switch a child’s investments to municipal bonds, low-dividend growth stocks, US savings bonds or the like. Or give a teenager appreciated assets that he can sell virtually tax-free if he turns 18 by 2010. For college savings, 529 accounts are more attractive; income is tax-deferred or even untaxed if used for educational purposes.