In 2008 as in 2007, Congress has officially extended childhood – at least for the purposes of calculating tax on investment income.The “kiddie tax” specifies the age at which children become a separate tax entity from their parents for purposes of calculating tax on investment income. Prior to 2006, children from birth to age 14 could earn investment income up to two times the standard dependent deduction and be taxed at their tax rate, typically 10 percent. Any investment income over that threshold was taxed at the parents’ presumably higher tax rate. After 14, all investment income was taxed at the child’s lower rate.In 2006, Congress increased the age to 18 years. A child is considered to be 18 for the entire tax year in which he or she turns 18. For 2007, the standard dependent deduction is $850, putting the threshold for investment income at $1,700. That amount is taxed at the child’s rate. Anything in excess of that amount is taxed at the parents’ rate.Effective in 2008, the dollar threshold has increased to $1,800 – meaning an extra $100 stays taxed at the child’s rate. In addition, Congress extended childhood to 19 and added in children under the age of 24 who are full-time students and whose earned income is not more than half of their support – regardless of whether or not the child is a dependent.The kiddie tax applies only to investment income, not earned income, so teens with jobs pay income tax on their wages at their tax rate, not their parents. Individuals who marry before age 18 presumably aren’t children anymore and if filing jointly, file at their own rate.When the kiddie tax stopped at age 14, many families moved investments to the child’s name at that age to take advantage of the child’s lower tax rate. As Congress has increased the age limit, however, that strategy has become less viable. With a capital gains rate of just 5 percent for kids in the 10 percent or 15 percent income tax bracket, however, parents in higher brackets may still want to consider transferring appreciating assets.It is important to always seek out competent tax professionals when dealing with this or any other tax issues.Colorado Comprehensive Wealth Management719-886-3377Registered Investment Advisory RepresentativeSecurities America Advisors Inc.Member NASD, SIPCFor more information, visit www.donnellservices.comColorado Comprehensive Wealth Management and Securities America Advisors Inc. are independent companies
