The term kiddie tax identifies the age in which kids become an individual tax entity separate from their parents for the purposes of calculation of taxes on investment income. Right from birth to the age of fourteen, children might earn investment income of up to double the standard dependent deduction. They are supposed to be taxed on the basis of their tax rate, usually around ten percent. Any sort of investment income above that threshold, would be taxed at the presumably higher tax rate of the parents.
After the age of fourteen, all the investment income has been taxed at the lower rate of the child. The Congress has officially extended the childhood age to 18, for the purpose of calculation of tax on the investment income. As per the Tax Increase Prevention and Reconciliation Act of 2005, passed in May 2006, the age was extended to eighteen. A child is said to be eighteen for the total tax year in which the child turns eighteen. For the year 2006, the threshold in terms of investment income has been fixed at $1,700. The amount is taxed at child’s rate. Anything, which is in excess of this amount, is taxed up at the rate of the parents.
Kiddie tax applies only in case of investment income and not earned income, therefore, teens with jobs would pay income tax as according to their rate and not their parents’. Also, individuals who get married before the age of eighteen are presumed to be adult as they are not children anymore, and in case if filing jointly, they file according to their own rate.
As it is, the change tends to put the future of the accounts set up under the Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act. As per these acts, the individuals might place the assets in the accounts for benefit of a child, yet retain control over the assets as trustee as long as the child doe not reach the age of majority, generally eighteen. The tax advantage of moving assets to the name of a child might now be deducted as income invested in such accounts over $1,700 would be taxed at the rate of the parent.
With the capital gain rate of five percent, in the ten percent or fifteen percent tax bracket, the parents falling in the higher brackets might still wish to consider the transferring of appreciating assets. However, parents who feel they had the years in between fourteen and eighteen to sell the assets in the portfolio of the child and potentially pay up no capital gain tax have lost the option.