Tax Tips
Tax Tip No. 10: Last Chance Tax Break
Act now to qualify for an expiring tax break for teens and college students.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 14, 2007
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You need to move quickly to get ahead of the latest kiddie-tax crackdown. These rules were created by Congress to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to their children’s lower tax bracket.
The kiddie tax taxes a youngster’s investment income of more than $1,700 at the parents’ rate. In 2007, the first $850 of a child’s unearned income is tax-free and the next $850 is taxed at his or her own rate.
This year, the tax disappears when a child turns 18. Starting in 2008, it expands to cover children under 19 and full-time students under 24. (Children who provide more than half of their own support are not affected by the tax change.)
What does this change mean to you? If you have children or grandkids between the ages of 18 and 23, they aren’t affected by the kiddie tax this year, but they will be next year. They can still take advantage of the 5% long-term capital gains rate available to taxpayers in the two lowest brackets this year.
Say you own $10,000 worth of stock that you bought years ago for $5,000. And let’s say you plan to give $10,000 to a child or grandchild to help pay college bills. If you sell your stock, you’ll owe the 15% capital-gains rate on $5,000, costing you $750. But give that stock to an 18-to-23-year-old to sell by year-end and the gain will be taxed at just 5%, saving the family $500. When you gift a stock or other property, the recipient assumes your original cost basis and holding period.
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