Under the kiddie tax, unearned income above an annual threshold received by a young child is taxed at the parents’ top tax rate. The income threshold for 2008 is $1,800.
The kiddie tax has been a thorn in the sides of parents for years. But it can really stick it to you in 2008.
Here’s why: Beginning in 2008, the tax generally applies to a child under age 19, or age 24 if he or she is a full-time student. Previously, the age limit was 18.
Strategy: Keep your child’s unearned income from investments as low as possible. Re-examine the holdings of children in college.
Example: You might have your child shift funds to investments that will not generate any additional taxable income for the rest of 2008. This could include growth stock, bank CDs or Treasury securities. Similarly, consider investments in tax-free municipal bonds or muni bond funds.
Tip: The kiddie-tax change may reduce or eliminate the benefit of the 0% long-term capital gain tax rate for certain children.