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Kiddy Tax Increase for 2007

On May 17, 2006 President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005. (The bill was initiated in Congress in 2005, thus the year.) The bill includes many provisions, but not all of them prevent a tax increase. Here we look at one of the increases in the bill.

The tax law includes provisions to keep families from shielding excessive income by holding investments in the names of children. Below a specified age, if the income exceeds a particular limit (which changes each year with inflation - $1700 for 2006), then that income is taxed at the parents' marginal tax rate. The effect of that is to tax the income exactly as it would be if the investments were held in the parents' name.

What this bill changes, effective in 2007, is the age at which the child can keep that income on his or her own tax return, keeping it away from the parents' higher tax rate. Previously that magic age was 14. It is now changing to 18.

Most families do not have significant investments, and they certainly do not have those in the name of their children. But for more wealthy families, that tax loophole just shrunk!

Note that in 2007 these rules were changed yet again by Congress with the 2007 Small Business Tax Act effective in 2008, so for planning or impact for 2008 or later, see the article that updates the Kiddie Tax rules.

"Tax software is no substitute for tax knowledge."

Any views expressed herein are based on our best information. The content of this web site was written as general information without specific individual information and thus may not apply in all situations. This material was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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Janelle Ogg, EA
Richard Ogg, EA