I was once asked about the kiddie tax, is it beneficial to keep the account under the child's name? I think it is. Even though investment income is taxed at the parent's rate when you start to liquidate the account to pay for college tuition, you still save taxes at the child's rate during the period when the investment was growing and the investment income was low.
When your child is under 18, or a full-time student under 23, you don't have to pay tax for the first $950 of investment income such as interest, dividends, capital gains for your child. In another words, the standard deduction for a child with only investment income is $950.
The next $950 investment income is taxed at the child's tax rate. Any investment income higher than $1,900 is taxed at the parent's tax rate, referred as the kiddie tax. If your child is young and the investment income is not more than $1900, you can reduce the tax by having investment accounts under your child's name.
If the investment income is less than $1,900, then it is not subject to the kiddie tax. Your child's standard deduction will increase if the child also has a job. The taxable income is taxed at the child's rate. The taxable income is greatly reduced by the higher standard deduction in this case.
One more reason to encourage your child to take a summer job!
No comments:
Post a Comment