Show #403 Airing Sunday, 10/14/07
The government just made it harder to cut your taxes. That's right, the new federal "kiddie tax" rules set some hidden traps that could cost you a lot of money. Here to explain is my law partner who never kids around, Michael Solomon.
Question: What's the "kiddie tax"?
Answer: The Kiddie Tax was designed to inhibit people from giving gifts to children or grandchildren in order to shift income, and income tax, from the parents' rates to their children's lower rates.
Here's what used to happen. Let's say Mom and Dad had purchased a CD. If their income tax rate was 35%, they'd pay 35 cents to Uncle Sam for every dollar of interest earned. But if they gave the CD to their minor child or grandchild, the interest would be taxed at the child's much lower tax rate. A 5 or 6-year-old child probably isn't earning too much money, so there might be no tax on the interest from the CD. This could save thousands of dollars in taxes.
So the federal government passed the Kiddie Tax. Originally, kids age 14 and older would pay tax at their lower rates, but kids under 14 would pay tax on their investments at their parents' tax rates.
Question: What's changed now?
Answer: The rules have been tightened up. Kids or grand kids under 18, not 14, pay tax at their parents rates, and kids all the way up to age 24 must pay tax at their parents' rates if they're going to college, and their parents are paying at least half of their support.
So now the tax advantages of giving money to kids under age 24 have been severely undercut.
Question: Is there any tax benefit left to giving assets to children?
Answer: Yes. There's still an income tax benefit. You can give assets to kids who are 24, and they'll pay tax at their own rates. While a 24 year old may be working, there's still a good chance that his or her income will be much less than the parents' or grandparents' income, and there may still be a tax savings.
And there's also a capital gains tax benefit. Let's say you have Microsoft stock that you bought years ago and now it's gone way up in value. If you sell, you'll pay capital gains tax of 15% at your rates. But if you give the stock to your kids or grand kids, and they sell it anytime after they reach age 24, they'll pay tax at their rates, which could be much lower!
Question: Is there any estate tax benefit to giving money away?
Answer: Yes, lifetime gifts can reduce mom and dad's estate taxes at death. There's still both a federal and Ohio estate or death tax, and you can reduce or eliminate that tax with lifetime gifts.
Question: Are we limited to gifts of $12,000 per year?
Answer: No. You can give away $12,000/year to as many people as you wish, and there's no gift tax or paperwork to file. But you can give away more, up to $1 million, with no gift tax. And you can give that all to one person at one time, or spread it around to different people over your lifetime.
Question: Any downside to making gifts to cut taxes?
Answer: Yes. Some people make gifts with the idea that the kids will give the money back if mom or dad needs it later on. That doesn't always happen though!
The government has tried to put a "chill" on gifts to "chill-dren" by tightening the kiddie tax. But transferring assets to children or others can still save thousands of dollars - if you know the rules. My thanks to Mike Solomon. We'll be right back.
