Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Congress' closing of 'kiddie-tax' loophole could cause confusion

- by Alan Duvall 

Published in Dayton Daily News  July 1, 2007 

“Who’s your Daddy?  Is he rich?”  -Zombies 

Congress has just fired its initial tax salvo against the wealthy.  In a recent tax bill, lawmakers have sought to close a loophole commonly referred to as the “kiddie-tax”.

A common ploy for high tax bracket parents is to gift appreciated or high yielding investments to children who have historically reported related investment income at reduced rates.  Attendant family tax savings can be utilized for college or other living expenses. 

Prior to 2006, children under the age of 14 with investment income could be forced to pay kiddie-taxes at their parents’ tax rates.  An amendment blind-sided many parents by expanding these provisions to children under the age of 18 in tax years after 2006. 

Beginning 2008, the new law requires certain kids with unearned investment income exceeding $1,700 per year pay federal tax at their parents’ highest marginal rate (Form 8615).  These rules apply to children under 19, or alternatively full-time students age 19-23 who are single-filers with at least one living parent by year-end.  An exception exists for children whose annual “earned” income exceeds one-half of the individual’s support.  

Parents of kiddie-tax children may elect to report children’s unearned income on their own returns by utilizing Form 8615.  Although such reporting may eliminate expenses of preparing extra children returns, the additional income may cost parent tax deductions (such as exemptions) reduced as a result of income phase-outs. 

Despite the new rules, parents may still shift $1,700 annual investment income to children to generate family tax savings of approximately $700 per year. 

Better yet, business-owning parents may elect to hire their children since earned income is not affected by the recent amendments.  The child can earn about $5,300 per year without obligation for any federal taxes and is in a 10-15 per cent bracket for the next $30,000 earnings.  Compare these amounts to the taxes paid by the parents (maximum 35% rates) and you have a prescription for large family savings.  Eligible families should factor into the equation FICA costs to children of approximately 15%, an amount which may be avoided if the employing family business is unincorporated. 

“Rich Daddy left you with a parachute.”  -Third Eye Blind 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.