For those of you who believe that you no longer have to report your child’s dividends at your tax rate because they turned 14 years old, I am a bearer of bad news.The Tax Increase Prevention and Reconciliation Act passed earlier this year increased the age from 14 to 18.This means that if your child has “unearned income” of over $1,700, then it must be taxed at your rates to prevent income shifting of family members to lower income tax bracket children.
There are a couple of planning points that may reduce this tax trap from parents:
- Delay collection of all passive income until the child turns 18.
- Invest in growth rather than dividend producing stocks.
- Invest in tax-exempt bonds.
- Invest in US Savings bonds.
- Invest into Section 529 college funds instead of the bank accounts owned by the children.
Consult with our firm for the best strategy before making your decisions since all tax situations are unique.