Kevin McCormally: I am Kevin McCormally of Kiplinger's, and I am here with Mary Beth Franklin, Senior Editor of Kiplinger's Personal Finance magazine to talk about Kiddie tax. Mary Beth, I know there been a change in these rules, but before we get to that, what is the Kiddie tax?
Mary Beth Franklin: The Kiddie tax is basically to prevent wealthy parents from trying to shift the income to their kids and paying less tax.
Kevin McCormally: So what's the change?
Mary Beth Franklin: Well, it used to be it only applied to kids 14-and-under, now it applies to kids 18-and-under and the really tricky part is it's retroactive to the beginning of 2006.
Kevin McCormally: But what kind of income does it apply to?
Mary Beth Franklin: Well, not earned income like kids will get from a summer job or a part time work. It's only unearned income, in other words investment income.
Kevin McCormally: And how is investment income earned by a child amount up age 18 taxed?
Mary Beth Franklin: Well, actually you have to have a lot of investment income for this to effect you. The first $850 of the child's investment income is tax free and the next 850 is at their own lower tax rate. It's only once you get over that $1700 limit that the higher tax of their parents rate would apply.
Kevin McCormally: How does the change from age 14 to age 18 affects parents who are planning around the Kiddie tax?
Mary Beth Franklin: Well, a lot of parents plan to pay for college with stocks as other assets. What they would normally do is give their stocks to kids and in the past let the kids let sell the stocks for the lower tax rate. Now, the kids will have to wait until they are at least 18 before they can sell the stock and take advantage of their tax brackets.
Kevin McCormally: And I understand that great thing happens in 2008.
Mary Beth Franklin: Yes, there is a great little desert at the end of this mess. In 2008, 2009, and 2010 those people in the lowest tax bracket which presumably would include kids would zero capital gains taxes when they sell their investments.
Kevin McCormally: So the parents can give stock that they have owned and is appreciated to their child, the child sells it no capital gains tax at all.
Mary Beth Franklin: Absolutely.
Kevin McCormally: Thank you very much.
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