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WHAT IS THE
KIDDIE TAX AND HOW HAS IT CHANGED?
The “Kiddie Tax” was established in 1986 to prevent wealthy parents
from avoiding taxes on their investments by giving these investments
to their children. In the past, this rule applied to children under
the age of 14. Under a new measure passed in May 2006 and
retroactive to January 1, 2006, the reach of the kiddie tax has been
expanded to include children under age 18. Here is what that means
for your 2006 taxes. For children under the age of 18, the first
$850 of unearned income (such as interest, dividends and capital
gains) is tax-free. The next $850 is taxed at the child's marginal
rate (generally 10%), with any amount above that taxed at the
parents' highest rate. Once children turn 18, they pay taxes on all
unearned income at their own lower rate.
WHAT SHOULD I DO NOW THAT THE KIDDIE TAX
AGE LIMIT HAS BEEN RAISED?
First of all, keep in mind that a child under age 18 may
continue to receive $1,700 of unearned income before paying tax at
the parents' higher tax rate. If your child’s portfolio is earning
more than $1,700, consider moving toward growth stocks or growth
mutual funds that pay little or no dividends. Another option is
Series EE US Savings Bonds. As long as your child waits until he or
she is 18 before cashing in the bonds, there is no kiddie tax on the
accumulated earnings.
I’M READY TO FILE MY TAX RETURN, BUT MY
CHILD DOESN’T
HAVE A SOCIAL SECURITY NUMBER YET. WHAT SHOULD I DO?
If you file your return claiming your child as a
dependent and do not provide a Social Security number on the return,
the dependent exemption will be disallowed. You have two options.
You could file your income tax return without claiming your child as
a dependent. Then, once you have your child’s number, you can file
an amended return. The other option is to request a filing
extension, using Form 4868. This gives you an additional six months
to get your child’s number and file your return.
Brought to you by the North Carolina
Association of Certified Public Accountants in cooperation with the AICPA.
©2007 The American Institute of Certified Public Accountants |
