New "Kiddie Tax" Rules for 2008

The 2007 Small Business Act contains changes which may impact college-aged children beginning in 2008. For a child subject to these rules, the child’s unearned income over $1,700 will be taxed at the parent's tax rate, which is presumably higher.

For children under age 18, nothing has changed. However, the new law expands the kiddie tax to apply to children that turn age 18 during the tax year, or turn age 19-23 if the child is a full-time student. These older children are exempt from the new kiddie tax rules if their earned income exceeds one-half of their total support for the year.

There are several tax planning strategies to avoid or minimize the effects of the new law. If your client has a child who is or will be age 18 to 23 and is a full-time student in 2007, consider taking any unrealized long-term capital gains in 2007. Also, to avoid the higher kiddie tax in the future, consider having the client move any income-generating securities into tax-free funds, growth stocks that do not generate dividends, or companies that pay qualified dividends. And finally, starting in 2008, consider having a self-employed client hire their child to work in their business. Remember—if the child’s earned income exceeds one-half of their support, the child will not be subject to the kiddie tax.