But taxpayers often pay a price for this income-shifting tactic.
Advice: Beware of the “kiddie tax.” If it applies, some of the child’s income will be taxed at a higher tax rate than the child’s basic rate, which defeats your original tax intentions.
Fortunately, you can reduce the kiddie-tax impact—or even sidestep it entirely— with some smart planning.
Basics of the kiddie tax
Income is normally taxed at the rate of the person who receives it. But unearned income (e.g., from investments) received by a child under age 14 is taxable at the parent’s top marginal tax rate once that income exceeds a certain annual threshold ($1,700 for 2006, up from $1,600 in 2005). The first $850 is ...(register to read more)