Understanding the kiddie tax rules
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 Dear
Tax Talk,
What is going on with the capital gains rate for 2007/2008 for a (tax) dependent 18-year-old who is using his mutual fund investment to pay for college? I read in February that such dependents would be taxed at their parents' rates if it passed in Congress. Has it passed?
-- Donna
Dear Donna,
Ages ago it used to be a tax strategy to shift assets to a minor
child to take advantage of the child's lower tax rates on unearned
income. The law changed, I believe it was in 1986, so that unearned
(investment) income of a child under age 14 in excess of a certain
amount (which has been indexed for inflation over the years) would
be taxed at the parent's marginal tax rate.
Ironically, it was the Tax Increase Prevention and
Reconciliation Act of 2005 that increased the age from 14 to 18
years. So long as you are age 18 or younger in 2007, even though
you are still a dependent of your parents, your capital gains investment
income will be taxed at your rates and not your parents' marginal
rates. A child born on Jan. 1, 1990, is considered to be age 18
at the end of 2007, even though he or she is not 18 years old until
2008.
The unearned investment income of a child will be
taxed at the parents' marginal rate if all of three conditions are
true.
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The unearned investment income will be
taxed at marginal rate if: |
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| 1. |
The child is under age 18 at the end of the tax year
or did not turn 18 on Jan. 1 of the following year. |
| 2. |
The child had investment income (such as dividends,
interest, capital gains, Social Security benefits) in
excess of the threshold ($1,700 in 2006). |
| 3. |
Either of the child's parents
was alive at the end of the year. |
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Form
8615, plus a mighty powerful computer, is needed to compute
the increased tax on the child's investment income. Obviously, you'll
need to have the parent's return completed first.
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the Experts" page, and select "taxes" as the topic.
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