Thursday, January 21, 2016

Be Aware of the Kiddie Tax

Did you know that account earnings for minors - children under 18 - may have tax consequences known as the Kiddie Tax? (Full time students up to age 24 may qualify.)

In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.

Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!

The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.

If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.

Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.