Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com
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Keogh Plan (See
Qualified Plan).
Kiddie Tax
The "kiddie tax" is a response
to parents who cut tax by shifting investments (and their income) to their
children, who are presumably taxed at a lower rate (unless you're Britney
Spears' mom). Traditionally, the kiddie tax applied until age 14. But in
2006, Congress raised the ceiling to 18, and in 2007 applied it to dependent
children under age 19 and dependent full-time students under age 24.
The tax itself is equal to your'
highest rate on your child's unearned income over $1,800 (2008). Here's how
it works:
-
If your child has less than
$900 of gross income, from all sources (work, investments, or anything
else) there's no need to even file a return.
-
If the child has investment
income, you'll have to file a return if their total income tops $900.
-
Once your child's net
investment income tops $1,800, the kiddie tax kicks in. (If your child
itemizes deductions and has more than $900 in deductible investment
expenses, the floor is $900 plus the deductible investment expenses.)
-
To figure the actual
tax, first figure your own tax. Then figure the amount by which your
children's income subject to the tax increases your tax. Finally, allocate
the extra tax to each child in proportion to each child's income subject
to the tax. (Got that?)
-
If you're married filing
separately, use the larger separate taxable income to figure the
tax.
-
If you're divorced, use the
income of the parent who has custody for the greatest part of the year.
-
Your child's income doesn't
increase your adjusted gross income for purposes of figuring limits on
deductions or credits. For example, your child's income doesn't affect
your ability to contribute to an IRA.
-
If your child's income derives
solely from interest and dividends, you can report it all on your own
return with Form
8814. You'll pay $105 plus 15% of the child's income over $900,
plus whatever kiddie tax is due. This saves you the trouble of filing your
child's own return. However, this choice will increase your
adjusted gross income for purposes of figuring limits on deductions or
credits.
Yes, the kiddie tax rules certainly
limit your ability to cut tax by shifting investment income to your
children. And you should consider the effect that shifting investments to
your children will have on
your family's ability to qualify for college financial aid. (Colleges will
expect you to use 35% of your child's assets towards the family
contribution, while you're expected to use just 6% of your own.)
But you can still save tax by
putting investments in your child's name before the kiddie tax kicks in. A
stock index fund paying a 2% dividend can grow to $90,000 before the
dividend income tops $1,800. The tax on 2% of $90,000 will be just $97.50.
If you held the fund yourself in the 28% bracket, you'd pay $364; in the
35% bracket you'd pay $515.
You can also give your children investments
that don't generate current income:
U.S. Savings Bonds that mature
after the child turns 19 or 24, for example, or
Municipal Bonds.
Figure the tax on
Form
8615. You can attach it to the child's return or to your own. For more information, see
IRS
Publication 929, "Tax Rules for Children and Dependents."
Kidnapped Children
Kidnapped children are
presumed to receive over half of their support from their custodial parents
-- and thus qualify as dependents -- during the time of their confinement,
so long as their kidnapper is a stranger, and not a relative. I sure hope
you never need to use this one.
Kindergarten (See
Dependent Care Credit
and Flexible
Spending Account)
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