The government started it in 2006 as a way to give a break to families whose children have investments in their name. But, guess what…of course there was an ulterior motive. What is this crazy tax? Sounds made up doesn’t it? I made sure to do some checking because I couldn’t believe that this is the actual term used by the US government to qualify the capital and investment gains our children receive. I LOVE IT! Kiddie tax. Anyways, back to the point. This tax and it’s new rules has another function, to keep parents, especially those in the higher tax brackets, from putting their own investments in their children’s names to save money. Let’s break this down a bit.
Basics of the ”Kiddie Tax”
So, the government realizes that our children don’t make much money. So they enacted this tax to give a sort of ”limited standard deduction” on investments and unearned income (including interest and capital gains.) So for 2008, your child had to have made at more than $900 in investment income for any taxes to be assessed. Any amount over that, would be taxed at the child’s 10% rate up to $1800. Any amount gained above the $1800 mark would then be taxed at the parent’s rate. This final step will effect few of us since most of our children do not have $30,000 in investments that would generate that $1800 gain (at 6% that is.)
You, however, would not receive the $900 deduction or the 10% on the next $900; you’d pay your normal rate for investment income (15% on qualified dividends and long-term capital gains ). If you were in the 25% federal tax bracket, that $1,800 in investment income would come to $450 in additional taxes for a short-term gain or $270 for a long-term gain.
Recent Changes in the Law
Before 2006, the law used to tax anyone over the age of 14 at their own tax rate, giving them quite the deal on their return. But guess what…the government has changed that. Now dependents up to age 19 and full-time students up to age 24 are subject to the kiddie tax. The only benefit is that they have raised the income limits over the years.
Why Change the Law?
Clever parents were giving “gifts” to their children of stock that was appreciating (gaining in value) and then having the child sell it earning their lower capital-gains tax. This was great because most children had a zero capital-gains tax in the lower income brackets, saving the parents 15% on their investment taxes. Lose 15% of your money…or give it to your kid to sell and keep it all. Seems like a mindless decision to me. But the government doesn’t like missing out on their cut…hence the increase in the “kiddie” ages.
Obviously, this new law and it’s provisions only effect those of us with a great deal of investments to protect, but think twice before you convince yourself that your child will save you money in your investment taxes…THE GOVERNMENT HAS CAUGHT ON!
Tags:
capital gains,
capital-gains tax,
children,
deduction,
investments,
kiddie tax,
limited standard deduction,
long-term gain,
short-term gain,
stock,
tax bracket,
unearned income 