Congress to Tighten Kiddie Tax Loophole
Beginning in 2008, Congress will ratchet up the restrictions imposed by the so called "kiddie tax " by increasing the age under which children are taxed at their parents' marginal rate for unearned income. The new cut off age will be age 18 and younger, or age 23 and younger for "children" who are full-time students.
In this recent article on Investors.com authored by Donald Jay Korn for Investors Business Daily, Korn discusses the new law, which targets upper-income families, and is designed to prevent such families from shielding income on dividends and long term gains by shifting such income to their children.
"A partial remedy for parents in higher brackets was to give appreciated assets they wanted to sell to their kids. That was especially attractive if the kids were in the two lowest tax brackets [which owe 0% on most dividends and long term gains]. They could sell the assets and owe no tax."
While the increased restrictions do exclude married children who file joint returns, as well as children whose own earned income constitutes more than one-half of their support, it would seem these exceptions will be applicable in only a small percentage of cases.
Finally, although the new law does impose increased restrictions, parents can still always save in gains taxes by transferring assets to their children to hold until after the child graduates college, and then having the child sell at his own (and most likely much lower) tax rate.
