The New Kiddie Tax Continues to Punish Parents

Posted on 07. Jun, 2007 by in Taxes

collegecosts.jpgI’ve spoken about the Kiddie Tax before and how it was initially established to help prevent wealthier parents from “stashing” cash and assets in the names of their kids so that they could avoid higher tax brackets.

However Congress, hoping to raise an estimated $1.4 billion in the next decade, has boosted the age of those subject to the kiddie tax by one year — from under age 18 to under age 19.

But the real problem is that full-time college students under age 24 are also caught. So, if you thought your 22-year-old college student had outgrown this tax, guess what: He or she could be subject to these provisions again.

As Steve Rosen explains, under the new rules — and Congress didn’t tinker with these limits — children can make up to $850 in investment income without having to pay any taxes. Income between $850 and $1,700 is taxed at the child’s lower rate. But if the child is the principal owner of these investments, any income above $1,700 is taxed not at a child’s rate, but at parents’ tax rates. This expanded provision doesn’t apply to children whose income from work is more than half the amount of their financial support.

“This seems to discourage saving,” said Sophie Beckmann, personal finance strategist for A.G. Edwards & Sons in St. Louis.

This regulation also makes no sense when you consider that a lot of the investment income in the hands of children has probably been bankrolled for college education.

Luckily, the tax provision doesn’t go into effect for a while, but it stills seems like a ridiculous idea when considering the increasing cost of education – for parents and students alike.


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