|
Congress has made a second change to the “Kiddie” tax in a little over a year that has effectively derailed income shifting strategies to children. The first change wiped out capital gains taxes for those in the two lowest tax brackets (usually children and elderly) in 2008, 2009 and 2010. But then realizing that some wealthy families could take advantage of this, Congress made a second change. The current law taxes investment income of children at their parents’ higher tax rate for children under 18 above a threshold ($850 is tax free and the next $850 taxed at the child’s lower tax rate with the excess taxed at the parents’ rate for 2007). Formerly it was age 14. Starting in 2008 the kiddie tax will be expanded to include dependents under age 19 and full–time students under age 24. Children who provide more than one-half their support are not affected by this change. This change does make the use of a Uniform Transfer to Minors (UTMA) accounts less tax efficient and providers of college savings 529 plans use this to promote sales of their tax favored (no taxes on 529 accounts if used for qualified college expenses) plans. Although this is true, the expenses and sales commissions and poor performance of many of these state sponsored 529 plans can still result in less money available for college even with this new kiddie tax change. If you have a UTMA, even with this recent change, the strategy remains the same. Invest for capital appreciation with little current income until college is within one or two years. When the investments are sold, even with a capital gains tax rate of 15% due, the UTMA should be able to produce higher after tax values than the more tax efficient, poorer performing more expensive 529 plans.
|
