Do your children have savings accounts or other investments held in their own name? If so, the tax on those investments could change. That's because recent tax legislation will expand the "kiddie tax" to cover children up to age 19 starting in 2008. For full-time students, the age limit will be even higher - up to age 24. Prior to 2006, the kiddie tax applied up to age 14. That limit increased to age 18 for 2006 and 2007.
A quick review of the kiddie tax: It applies to investment earnings such as interest and dividends. It doesn't cover earned income - wages from your kid's summer job, for example. The first $850 of your child's investment income is generally free of tax. The next $850 is taxed at the child's own rate. But all unearned income above $1,700 is taxed at your highest tax rate, rather than at your child's lower rate.
The intent of the latest increase in the age limit for the kiddie tax is to limit income shifting. That's the strategy of putting investments in a child's name to take advantage of their lower tax rates.
Before year-end, you should carefully review all savings and other investments held in your child's name to make sure you know how they're being taxed and how next year's change will affect you. There may be actions you should take before next year's rule goes into effect. Also, this may be the time to switch to new college funding strategies.
Please contact our office if you have questions about how the kiddie tax and the upcoming increase in the age limit might affect you.
Steven C. Leibold, EA San Diego Business Advisors www.sdbizadv.com 619-294-4286