The "kiddie-tax" rules
The tax technique of transferring assets into your children's names is called income shifting. It seeks to take income out of your higher tax bracket and place it in the
lowest (15%) tax bracket of your children. While some tax savings are available through this approach, the "kiddie tax" rules impose substantial limitations on it for
children under 14.
The kiddie tax rules only apply to your children who are under 14 years old. Essentially, the rules take the investment income of the child above $1,500 (in 2000),
called "net unearned income", and then tax it at the parents' (higher) tax rate. Accordingly, while some savings (on up to $1,500 of income) can still be enjoyed
through this manner of income shifting, substantial tax savings aren't available. In reading through the following example, note that under the regular tax rules a
dependent child cannot claim a personal exemption and is limited to a $750 (in 2000) standard deduction (unless his "earned" income, e.g., from a job, plus $250
exceeds that amount).
Under the kiddie tax and under certain conditions, parents can elect to include the child's income on their own return. This avoids the need for a separate return for
the child, but generally doesn't change the tax on the child's unearned income, which is still taxed at the parents' tax rate. (If the election is made, the addition of the
child's income to the parent's adjusted gross income may affect the various floors and ceilings for, and therefore the amounts of, the parents' deductions and
limitations.)
Note that to transfer income to a child, you must actually transfer ownership of the asset producing the income: you cannot merely transfer the income itself. Thus, in
the above example, the parents were careful to give the child the ownership of the bond itself and didn't merely assign the income from it to him. Property can be
transferred to minor children using custodial accounts under the state Uniform Gifts or Transfers to Minors Acts.
If you have questions or concerns regarding the "Kiddie Tax" rules, please feel free to contact our offices.
|
