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Divorce and taxes: No kiddie tax respite

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in Small Business Tax

Q. I’ve set up college custodial accounts for my son’s young children. Now, he and his wife are divorcing. Will the kiddie tax still apply to the excess income in their accounts? S.M., New Rochelle, N.Y.

A. Yes. Normally, the kiddie tax applies to investment income received by an under-age-18 child to the extent that the annual total exceeds a specified threshold ($1,700 for 2006). The excess is taxed at the parents’ top marginal tax rate. In the case of a divorce, the kiddie tax is based on the tax rate for the custodial parent. Tip: If the parents are still married at the end of the year and file separate returns, the applicable tax rate is the top rate of the spouse with the most taxable income.

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