Kiddie tax changed to age 24

[don]

Heard about this on the Clark Howard show. A Google search turned up links to
articles that still talk about the change to 18, not 24.

http://clarkhoward.com/shownotes/2007/05/30/index.html
If you pay "Kiddie Tax," you need to act now!
Clark wants you to know about a tax change going on in Washington D.C., which
will affect upper middle-class and wealthy families. These families will set
up a custodial account for the benefit of a son or daughter. These children
were subject to paying a punitive tax for that money. At first, it was through
age 14. Then it was moved to age 18. Just recently, it was bumped up again to
age 24. That means that these people are now adults, possibly living on their
own, and still paying this “kiddie tax.” The good news is that there is an
out. If you have a child with a custodial account, this year you can sell
holdings and you’re only taxed five percent. After January 2008, that tax goes
up to 35 percent. So, if your child is 18-23, make sure you talk to an
accountant and get this taken care of this year. Get tax advice pronto to
ensure you make smart tax moves this year and in future years.

[Mark Bole]

don wrote:
[...]
> Clark wants you to know about a tax change going on in Washington D.C., which
> will affect upper middle-class and wealthy families. These families will set
> up a custodial account for the benefit of a son or daughter. These children
> were subject to paying a punitive tax for that money. At first, it was through
> age 14. Then it was moved to age 18. Just recently, it was bumped up again to
> age 24. That means that these people are now adults, possibly living on their
> own, and still paying this “kiddie tax.”

First, it's "punitive" only to the extent that all taxes are punitive --
it simply taxed the investment income at the parent's rate, nothing
more. Given all the tax breaks for having kids, not providing yet
another one doesn't seem unfair.

Second, the age extension is under age 19, or under age 24 if a full
time student and not married filing joint. So "independent" adults
living on their own (not full time students, or students who support
themselves on earned income) are not affected.

One driving factor was to close a loophole where children could take
advantage of the zero capital gains tax rate in 2008. The overall tax
bill was intended to be revenue-neutral (breaks offset by increases).

http://tax.cchgroup.com/legislation/2007-small-business-work.pdf

-Mark Bole

[joetaxpayer]

don wrote:

> Heard about this on the Clark Howard show. A Google search turned up links to
> articles that still talk about the change to 18, not 24.
>
> http://clarkhoward.com/shownotes/2007/05/30/index.html

> If you have a child with a custodial account, this year you can sell
> holdings and you’re only taxed five percent.

Only for long term cap gains, if the student's taxable income is less
than $31,850.

> After January 2008, that tax goes
> up to 35 percent.

What? The kiddie tax taxes the child's unearned income over $1700 at the
parent's rate. So, interest is taxed at the marginal rate (up to 35% of
course), but dividends and long term cap gains are 15% only. Where does
he get 35% from?

Mr. Howard has his information a bit confused, even though the story was
worth putting out there. He can use an editor to help improve his writing.

One should continue to manage a child's money to capture the $1700 in
income/gains each year, and consider the 529 account if the money is
earmarked for college.

Side note - Googling 'kiddie tax 24' (leave off the quotes) yields a
good Forbes story published 5/30/07, as well as WSJ, and
savingforcollege.com articles.

JOE