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Make up the tax difference for the kids

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Q. I bought mutual funds for my grandchild’s custodial account when she was 11. Now that she’s 15, it appears that her parents will have to pay the kiddie tax on the income this year. Can I pay it instead? S.P.M., Duluth, Minn.

A. Not directly. As you probably know, the age threshold for the kiddie tax is rising from 14 to 18 this year. So, any unearned income above the annual threshold ($1,700 for 2006) that the 15-year-old receives will be taxed at her parents’ top marginal rate. When the tax bill comes due, you can offer to make a gift to reimburse her parents for the tax difference. Tip: This may be a good time to revise investment strategies for your grandchild with taxes in mind.

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