Kiddie Tax
We all know that children can be taxing especially if they are teenagers. Unfortunately, beginning in 2008 they will be even more so, when the “kiddie tax” will be expanded. The expanded definition will include children up to 19 (presently 18) as well as dependent, full time students up to age 24.
The original purpose of the “kiddie tax” was to stop people from transferring investments to a child that may be in a lower tax bracket (hiding income from taxation). This tax is made up of rules that determine the tax on a child’s investment income. In 2007 the first $850 of a child’s investment income is tax free, then, the next $850 is taxed at the child’s own tax rate. Any unearned income over $1,700, in 2007, is taxed at the parent’s higher rate (adjusted for inflation).
Why the concern over this? Many people were holding off shifting assets and having their kids sell them, from 2007 until 2008. Why? In 2008 a 0% capital gains tax rate would apply to those in the two lowest income tax brackets.
If you have kids from 18-23 by the end of 2007 there is still time to act. Until 12/31/2007 those in the two-lowest tax brackets can enjoy a 5% capital gains tax rate versus their parent’s 15% capital gains tax rate in 2008.
Do you have …
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1. Appreciated securities?
2. Over concentrated position in one security?
3. Planned a major purchase (i.e. car) in the next year?
4. Children in the 18-23 year old range?
You might consider transferring these funding assets to the kids and sell before year end 2007. The tax would be 5% in 2007 versus 15% in 2008. Then, use the proceeds to reposition assets or make that large purchase.
Also, this new wrinkle in tax planning will make saving money for college in a child’s name not tax effective.
You know people do things for their own self interest. I do not mean being selfish. Rather, if you look at how this original legislation came about it is obvious people did the transfer to the kids because they felt taxes were too high on their unearned income. Congress does not get it … every time Congress zigs … people zag.
It is not that the taxes you pay are not high enough … no … Congress spends too much. A single solution is to reduce tax rates. Ever since John Kennedy did the first major tax cut, and all other tax cuts done since then, the revenue has increased into Washington. Every time tax rates go up – taxes into Washington decrease.
An interesting side note … In 2004 George W. Bush stood by his guns to keep tax rates low. The opposition claimed that the American people were not hurting enough and taxes should be raised. Bush estimated that by 2010 the then $480 billion deficit would be cut in half. In the fall of 2007, today, the deficit is already below one-half at $160 billion. The deficit continues to drop like a rock as tax money is flowing into Washington. (Oh, and this deficit decrease was done financing a war, a major shock to our economy at 9/11, a business recession, Katrina, Rita and countless other tragedies – Does anyone get it??) Would you like an extra tax refund??? Demand that everything in the Washington budget be cut by 10%, including salaries. You would see a bonus refund immediately!