Focus on shifting income to grown children who qualify for tax-free capital gains. By Mary Beth Franklin, Senior Editor December 18, 2009 The days of giving appreciated assets or income-producing property to young children and teens as a way to trim the family’s tax bill are history. But older children and other lower-income family members, such as elderly parents, who qualify for a temporary 0% capital-gains rate may benefit mightily from your gifts.The kiddie tax, which taxes a child’s investment income above certain levels at a parent’s higher tax rate, now applies to children under 19 and to full-time students under 24. Previously, it disappeared when a child turned 18. (Children who provide more than half of their own support are not affected by the kiddie-tax change.) For 2009, the first $950 of a child’s unearned income is tax-free and the next $950 is taxed at his or her own rate. But a youngster’s investment income in excess of $1,900 is taxed at the parents’ higher rate. While the latest kiddie-tax rules limit your ability to shift income to your younger children, your young adult children or other family members may benefit from another tax new rule that allows those in the two lowest income-tax brackets to claim long-term gains and qualified dividends tax-free for 2009, and for 2010 as well. Advertisement 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 your 25-year-old daughter before the end of the year to help buy her first home. (She’ll be off to a great start because she probably will also qualify for the new $8,000 tax credit for first-time home buyers). If you sell your stock, you’ll owe the 15% capital-gains rate on $5,000, costing you $750. But give that stock to your daughter to sell, and assuming she is in the 10% or 15% income-tax bracket, she’ll qualify for the 0% capital-gains rate. That means the $5,000 gain will be tax-free for her, saving your family $750. When you give someone stock or other property, the recipient assumes your original cost basis and holding period. In 2009, you can gift up to $13,000 per recipient, or you and your spouse together can gift up to $26,000 per recipient, without filing a federal gift-tax form.