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Many people wonder how they can save taxes by transferring assets into their children\u2019s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.<\/p>\n
While some tax savings are available through this approach, the \u201ckiddie tax\u201d rules impose substantial limitations if:<\/p>\n
The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year \u2014 $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren\u2019t substantial.<\/p>\n
If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they\u2019ll be taxed on that excess amount at your (the parents\u2019) tax rates if your rates are higher than the children\u2019s tax rates. This kiddie tax is calculated by computing the \u201callocable parental tax\u201d and special allocation rules apply if the parents have more than one child subject to the kiddie tax.<\/p>\n
Note: <\/strong>Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates\u2019 and trusts\u2019 ordinary and capital gain rates, instead of the parents\u2019 tax rates.<\/p>\n Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can\u2019t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.<\/p>\n Possible saving vehicles<\/strong><\/p>\n The portion of investment income of a child that\u2019s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:<\/p>\n Investments that produce no taxable income \u2014 and which therefore aren\u2019t subject to the kiddie tax \u2014 also include tax-advantaged savings vehicles such as:<\/p>\n A child\u2019s earned<\/em> income (as opposed to investment income) is taxed at the child\u2019s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.<\/p>\n If the kiddie tax applies, it\u2019s computed and reported on Form 8615, which is attached to the child\u2019s tax return.<\/p>\n Two reporting options<\/strong><\/p>\n Parents can elect to include the child\u2019s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax.<\/p>\n \u00a9 2022<\/em><\/p>\n <\/body> Many people wonder how they can save taxes by transferring assets into their children\u2019s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. While some tax savings are available through this approach, the \u201ckiddie […]<\/p>\n\n
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