4 ways to cut the ‘kiddie tax’ down to size

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in Small Business Tax,Small Business Tax Deduction Strategies

For parents and grandparents, a basic tax strategy is to transfer income-producing assets (e.g., cash, stock, real estate) to the young ones. The subsequent income is generally taxed at the child’s low tax rate, rather than the elder’s higher one.

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)

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