Changes in federal tax laws for 2006 could find parents paying a hefty bill if they have investments in their children?s name.
“It?s keeping us from income shifting from a more well-to-do parent to the child,” Bryan Kelly, a certified financial planner with the Bel Air-based Kelly Financial Group LLC, said of the changes to the “kiddie tax” law.
The law, part of the Tax Increase Prevention and Reconciliation Act of 2005, requires that unearned income, such as dividends and interest, held in a custodial account in the child?s name, be taxed at the parents? tax rate, which is usually higher than a child?s. The law also says that the tax applies to children under 18 on net unearned income of more than $1,700. Previously, the law applied to children under 14. It is retroactive to Jan. 1.
“The provision is exempt where a minor is married and files a joint tax return, or on certain disability trusts,” Kelly said. “But most of us are going to have this hit us if we have high-income vehicles in a child?s name.”
Kelly and Severna Park financial planner Robert Clark of Clark Co. said parents can move some of the money into 529 College Savings Plans, which are tax-free accounts are used to finance a child?s higher education expenses.
Clark agreed that the 529 plans are “one alternative,” but another could be for parents to help fund their child?s retirement in such a way that the child cannot access the money until they reach age 60.
“You can set up a trust [account] and have an annuity owned by the trust to make sure the child doesn?t have access to that money before a certain age,” Clark said.
Kelly, however, warned taxpayers not to do anything without knowing all implications of the “kiddie tax” law.
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» This is the first in an occasional series that will address changes in the federal tax law.
