Monday, September
6 2010
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Monday, September
6 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2007 October 2007B - What You Can Do Before the Kiddie Tax Loophole Closes By Forte News Department When President Bush signed new legislation in May to
limit gifts to children that take advantage of their lower tax rate, it was the
second time in just over 12 months that Congress extended the reach of the
so-called kiddie tax, which subjects a child’s income to his/her parents’
higher tax rate. Maneuvering around the kiddie tax has helped parents
save for college educations for years, and given the changes, it’s a good idea
to consult a financial or tax adviser to discuss your options. Congress apparently got fed up with a particular tax
strategy used by wealthy families who transfer large piles of stock, mutual
fund shares and other assets to their kids (who are typically in the lowest two
income brackets of 10 percent and 15 percent) so they could sell those
securities at a low capital gains rate. The top rate on long-term capital gains
and qualified corporate dividends is 15 percent, but since 2003, those in the
lowest two income brackets had a shot at a 5 percent capital gains, which is
scheduled to drop to zero for those low-income taxpayers in 2008. So here’s what’s happening this year and next. During
2007, investment income for a child 17 years old or younger (measured as of
Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before
2006’s changes in the law, the kiddie tax applied only to kids younger than
14.) Starting in 2008, the age limit for the kiddie tax
will rise to 18 and under, or 23 and under if the child is a full-time student.
There are some exceptions for kids with paid jobs – the expanded provision
applies only to children whose earned income does not exceed one-half of the
amount of their support needs. What you can do now If you had put appreciated securities in your child’s
name and the child is a full-time student under the age of 23 but at least 18,
your child can sell those securities this year and still claim the 5 percent
capital gains rate. There won’t be a zero capital gains rate available to your
student next year, so you need to act before the end of the year to take
advantage of the 5 percent rate before it becomes the parents’ 15 percent rate
in 2008 via the kiddie tax. You may also want to start or redouble your efforts
in the 529 college savings plans you’ve set up for your kids. Qualified
withdrawals for education are tax-free and therefore wouldn’t be subject to the
kiddie tax. The same is true for qualified withdrawals from Coverdell education
savings accounts. Outside of 529 plans, you might consider investments
that generate little or no taxable income such as municipal bonds. Watch out for
financial aid Whatever gift and tax strategies you apply to your
college savings strategy, make sure those assets don’t undermine any efforts
your child is making to secure financial aid. October 2007 — This column is
produced by the Financial Planning Association, the membership organization for
the financial planning community, and is provided by David W. Henion, a local
member of FPA. | ||||||||||||||
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