Who’s a Kiddie?

Add comment January 18th, 2008

  Tawn M. Jacobs, MST, CPA, CFP® The kiddie tax law was originally established to prevent well-off families from abusing the strategy of shifting unearned income to their children, where it would be taxed at a lower tax rate than their own. Under the kiddie tax, any amount of a child’s unearned income in 2007 in excess of $1,700 (probably $1,800 for 2008) is taxed at the parent’s tax rate. Until recently, the kiddie tax only applied to children under the age of 14, but in 2005, the age moved to 18.  Now, effective Jan. 1, 2008, the kiddie tax will apply to children age 18 and younger as well as college students under the age of 24. 

So who’s a kiddie in 2008?  Definitely a child under the age of 19, and potentially a child between the ages of 19 and 23 if they are a student is a kiddie.  Put another way, the kiddie tax will never affect a child who is 24 or older at year-end.

 In the law passed last spring, the kiddie tax was considered to be an offset provision for tax breaks given to small businesses, but there is more to the story. Congress got a little nutty when it passed a previous law that allowed the capital gains tax rate to drop all the way down to zero in 2008 for people in the lowest tax brackets (see tomorrow’s blog). Then they realized that even kids from wealthy households could be in the lowest tax bracket. So they passed the new kiddie tax and turned all the American “kiddies” into little Dutch boys to plug the hole in their legislative dike and give small businesses a break.At the end of the day, the kiddie tax leads to a higher tax bill, and families will ultimately seek out alternative types of investments and accounts, in conjunction with credits, to minimize their taxes.