- Kiddie tax rules for 2007
The kiddie tax keeps aging
If your child had investment income and was under the age of 18 on Jan. 1, 2008, some of that income might be subject to the so-called “kiddie tax.” The tax is meant to discourage parents from reducing their own taxes by shifting investments to their children, with their typically lower tax brackets.
While it once applied to children ages 14 and under, for Tax Year 2007 it includes children under age 18. It covers only investment income, such as interest and dividends, not income from wages or self-employment.
The tax kicks in when your child’s investment income exceeds $1,700. The first $850 is tax free, the second $850 is taxed at the child’s rate of 10 percent (or 5 percent for qualified dividends). Investment income above that amount is subject to the kiddie tax – that is, your marginal tax rate, or the rate of tax on the last dollar you earned.
Does my child need to file an income tax return?
- No, not if the investment income is less than $850.
- No, not if you elect to compute it on your return and these conditions are met: Your child’s 2007 income is only from interest and dividends; the total income is more than $850, but less than $8,500; and estimated 2007 tax payments were not made in your child’s name and Social Security number. One note of CAUTION: Adding your child’s income to your return will increase yours and could affect your ability to take certain deductions, such as those for an educations savings account or a Roth IRA.
- Yes, if you child has investment income higher than $300 AND earned income that together are greater than $850.
However, your child can work and earn up to $5,350 without filing a tax return. However, your child might want to file to recover any money withheld by an employer.
If you file a separate return for your child using TurboTax, do your own tax return first. Either start a new return for your child from your desktop product (e-filing will be an added cost) or online (there will be a cost for the return and for e-filing).
Starting in 2008, the kiddie tax will extend to some dependent children ages 19 through 23. This could affect taxpayers who have given investments to children with the idea of having them cash out the investments to pay for college. The 2008 expanded tax applies to:
- Those age 18 whose earned income is less than 50 percent of their support.
- Those ages 19 to 23 who are full-time students and whose earned income is less than 50 percent of their support.
