Kiddie Tax Doesn’t Play NiceSubmitted by Prosperity Advisory Group on June 19th, 2018
If you have ever met with a financial advisor, you have probably been told about the importance of starting to save early in life. The earlier you start saving, the more time your money has to grow through compounding. However, if you start saving early enough without the guidance of a financial advisor, you could be paying the price of the not-so-nice kiddie tax.
What is the Kiddie Tax and Who Does it Affect?
The kiddie tax rules were put in place to prevent parents in high tax brackets from shifting income to a child to take advantage of the child’s lower tax bracket.
The kiddie tax rule applies to children up to age 19 (24 if a full-time student) with unearned income exceeding $2,100, at least one living parent, who do not have earned income exceeding one-half of their own support, and who do not file a joint return. Unearned income includes income other than compensation for services rendered (i.e. capital gains, dividends and interest).
Under the rule, any unearned income over $2,100 is taxed at the less favorable rates paid by trusts and estates (prior to 2018, this unearned income was taxed at the parents’ higher tax rate).
How Can I Minimize My Kiddie Tax Consequences?
- Invest child’s funds in equities or other non-income producing assets that are more likely to appreciate in value rather than income producing investments such as bonds
- Transfer assets to certain qualified tuition programs which are not subject to the kiddie tax
- Family-owned businesses might consider employing the child to work in the business. The earned income of the child will not be subject to kiddie tax. The child can then save tax by contributing a portion of their earned income to an IRA or 401(k) program.
To learn more about the kiddie tax and tax-efficient ways for you or your children to start saving in the early years, contact Prosperity Advisory Group so we can assist you on your financial journey to confidence.