The Kiddie Tax Rules Change - Again

If your children have custodial accounts - a UTMA or UGMA - and they will have college costs soon, you should consider taking account gains this year. 

The Kiddie Tax used to be for children under age 14.  In 2006 the rule was changed so that kids under the age of 18 were affected.  Starting in 2008 children under age 19 and children who are still dependents who are under age 24 will be subject to the Kiddie Tax rules. 

Under the Kiddie Tax rules, income over $1,700 earned by children (as defined above) is taxed at the parent’s tax rate instead of the child’s tax rate. 

The latest change takes affect in January 2008.  So if you have a child that is 18 in 2007, they can take any gains and still be taxed at their own tax rate.  Taking gains this year may save you about 10% in taxes. 

If the funds aren’t needed right away, consider putting them in a 529 plan until needed.  Withdrawals from 529 plans aren’t subject to tax as long as used for qualified education expenses.