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					Kiddie Tax Terminator
                    Introduction

• Years ago, Congress came up with the anti-taxpayer
  concept known as the Kiddie Tax.
• It’s intended to discourage high-bracket parents from
  shifting taxable income to their low-bracket kids.
• The Kiddie Tax rules have become a moving target due
  to unfavorable law changes in 2006 and 2007.
• We will show you how to work around the changes.
• Earned income from jobs or self-employment is always
  Kiddie Tax-exempt.
          Child’s Age Is the Key Factor

Old Rules

• Before 2006, the Kiddie Tax only applied when the child
  was under age 14 at yearend.
          Child’s Age Is the Key Factor

Not-So-Old Rules

•   For tax years beginning in 2006 and 2007, the magic
    age was changed to 18.
•   So for 2007, the Kiddie Tax can potentially apply if the
    child is under age 18 as of 12/31/07.
          Child’s Age Is the Key Factor

New Rules
For tax years beginning in 2008 and beyond:
• The Kiddie Tax can potentially come into play until the
  year during which the child turns age 24.
• However, for a child who is age 19-23 at yearend, the
  Kiddie Tax can only apply if she is a student for that
  year.
     Kiddie Tax Rules for 2006 and 2007
• If a child is under age 18 as of yearend the Kiddie Tax is
  a potential issue for 2006 and 2007. However, all four of
  the following requirements must be met for the year.
• Requirement 1- One or both of the child’s parents are
  alive and in a higher federal income tax bracket.
• Requirement 2- The child doesn’t file jointly.
• Requirement 3- The child’s unearned income exceeds
  $1,700.
• Requirement 4- The child has not reached age 18 at
  yearend.
• Key Point- The Kiddie Tax rules pay no attention to
  whether or not the child is claimed as a dependent on
  the parent’s return.
 Kiddie Tax Termination Strategy for 2007

• The Kiddie Tax won’t affect a child who is age 18 or
  older as of 12/31/07.
• For a child this age, it may be advisable to trigger some
  taxable gains and income before yearend.
• The income and gains won’t be hit with the Kiddie Tax
  this year (because the child is 18 or older).
• Kiddie Tax exposure in future years will be reduced.
        New Kiddie Tax Rules for 2008

• The unearned income threshold for 2008 will probably be
  $1,800.
• Properly determining the amount of a child’s support and
  the amount of a child’s earned income will be more
  important.
• For assistance see “Kiddie Tax Exposure Questionnaire”
  and “Child’s Support and Earned Income Calculator.”
      New Rules If Child Is Age 18-23

• If child is age 18, and his earned income doesn’t exceed
  half of his support for the year, he is potentially subject to
  the Kiddie Tax for 2008 and beyond.
• If child is 19-23, and a student, and his earned income
  doesn’t exceed half of his support, he is potentially
  subject to the Kiddie Tax for 2008 and beyond.
• Makes no difference whether or not he is claimed as a
  dependent on his parent’s return.
• If age 19-23 and not a student for the year, he is exempt
  from the Kiddie Tax for that year.
 Tax Capacity for Kiddie-Tax-Exempt Child

• For 2008, a Kiddie-Tax-exempt child can have more than
  $31,850 of taxable income and still be within the 15%
  federal income tax rate bracket.
• Individuals in the 15% bracket or the 10% bracket will
  pay that rate on 2008 ordinary income (including short-
  term capital gains).
• They will pay 0% on 2008 long-term capital gains and
  qualified dividends.
• Bottom line: a Kiddie-Tax-exempt child will have a lot of
  tax capacity in 2008.
 Kiddie Tax Termination Strategies for 2008

• Earned income for jobs or self-employment is always
  Kiddie-Tax-exempt.
• Exploit unearned income threshold (probably $1,800).
• When the unearned income threshold is exceeded only
  by a little the Kiddie Tax hit will be nominal.
• The Kiddie Tax can usually be avoided or kept to a bare
  minimum by picking the right investments.
 Kiddie Tax Termination Strategies for 2008

• A college Student will often be Kiddie-Tax-exempt in the
  year she graduates, because her earned income will
  exceed 50% of her support.
• Postponing stock sales until that year or later will avoid
  the Kiddie Tax.
• For money in tax-deferred or tax-exempt investments,
  there’s no tax disadvantage if the money is spent on
  something other than education expenses. This is not
  true for money invested in a Section 529 plan.
• The 529 plan advantage can disappear if withdrawals
  are not actually tax-free, and become subject to the
  Kiddie Tax at rates up to 35%.
       Exploit Taxable Income Limitation

• When a child provides over half of his own support for
  the year, he can claim a full standard deduction.
• When a child provides over half of his own support, he
  can claim a personal exemption for himself.
• These writeoffs can reduce the child’s taxable income to
  the point where the Kiddie Tax doesn’t apply or is only a
  minor irritant.
• A child can provide for his own support with unearned
  income, earned income, withdrawals from bank and
  investment accounts, and by borrowing in his own name
  (such by taking out student loans).
    Generate Earned Income to Terminate
                Kiddie Tax
• Kiddie Tax cannot possibly hit a child who is age 18-23 if
  her earned income exceeds 50% of her support for the
  year.
• When a child has earned income, she can also
  contribute to a traditional or Roth IRA.
• More earned income can also result in a bigger standard
  deduction for the child and possibly a personal
  exemption deduction too.
• Often, the easiest way to generate earned income is to
  have the parent’s business hire the child.
• Parents can also hire their kids to perform non-business
  chores.
     Manipulating Child's Support and
             Earned Income
• Results before Strategy:

• Ginny, age 21, is a student at a state university in 2008.

• She has $6,000 of unearned income from a Crummey
  Trust.

• Her parents are in the 35% tax bracket.

• Her support, including college costs, is $26,000.

• Results: Ginny's tax bill is $1,560 (including Kiddie Tax).
  Manipulating Child's Support and Earned
                  Income
• Recommended Kiddie Tax Termination Strategy:

• Arrange for $3,000 of earned income from work-study
  and jobs and use the money for her own support
  (including college costs).

• Have Crummey Trust distribute the $6,000 income and
  use it for her support.

• Have Ginny take out $5,000 in student loans and use for
  her support.
  Manipulating Child's Support and Earned
                  Income
• Results after Strategy:

• Ginny provides half of her own support ($6,000 trust
  income + $3,000 earned income + $5,000 loan).

• Therefore, she is not a dependent for 2008.

• She can claim a $3,500 personal exemption and a
  $5,500 standard deduction for 2008.

• Ginny now has zero taxable income.

• Results: Ginny owes no federal income tax for 2008.
  Adding Earned Income and Manipulating
                 Support
• Results before Strategy:
• Carla, age 19, is a college student at a two-year
  college in 2008.
• She has $6,500 of unearned income from a
  Crummey Trust.
• Her parents are in the 35% tax bracket.
• Her support, including college costs, is $18,000.
• Carla's tax bill is $1,735 (including Kiddie Tax).
   Adding Earned Income and Manipulating
                  Support
• Recommended Kiddie Tax Termination Strategy:

• Arrange for $9,500 of earned income from a job.

• Have her use the money for her own support.

• Have Crummey Trust distribute $6,500 unearned income to Carla.

• Have her use the money for her own support.
     Adding Earned Income and Manipulating
                    Support
•   Results after Strategy:

•   Carla provides over half of own support ($6,500 from trust + $9,500 earned).

•   Therefore, she is not a dependent for 2008.

•   She can claim a $3,500 personal exemption and a $5,500 standard deduction.

•   Since earned income exceeds 50% of her support, she is also Kiddie-Tax-exempt.

•   Results: Carla's tax is $700, and an education tax credit may reduce it to zero.

•   Conclusion: By adding earned income and manipulating support, the Kiddie Tax
    was terminated.

•   Bonus Conclusion: Since Carla is Kiddie-Tax-exempt, there's opportunity for her
    Crummey Trust to trigger more income and capital gains before yearend and have
    them taxed at Carla's low 2008 rates. If Carla enters a four-year college after 2008,
    her support costs may rise and she may not have enough earned income to be KT
    exempt. Taking action in 2008 could minimize KT problems in later years.
             Generate Earned Income

• Results before Strategy:

• Caleb is a 15 year old student and dependent of his
  parents for 2008.

• He has $5,500 of unearned income from a custodial
  account.

• His parents are in the 35% tax bracket.

• Results: Caleb's tax bill is $1,385 (including Kiddie Tax).
            Generate Earned Income

• Recommended Kiddie Tax Termination Strategy:


• Have Dad's business hire Caleb to generate $5,000 of
  earned income for Caleb.
               Generate Earned Income

• Results after Strategy:

• Caleb's standard deduction jumps to $5,300.

• He can make a $5,000 deductible IRA contribution.

• Caleb's federal income tax bill for 2008 drops to $70.

• Conclusion: By adding earned income and making a deductible
  IRA contribution, the Kiddie Tax was terminated.

• Bonus Conclusion: The IRA generally won't affect CFA eligibility.

• Bonus Conclusion: If $5,000 is put in Caleb’s IRA for four years, it
  will be worth $381,000 at age 60 (assuming a 7% return).

• Bonus Conclusion: Hiring Caleb cut’s Dad’s tax bill too.
Earned Income from Chores and Babysitting

• Results before Strategy:

• Sienna is a 14-year-old student and dependent of her
  parents for 2008.

• She has $5,000 of unearned ordinary income from a
  custodial account.

• Her parents are in the 35% tax bracket.

• Results: Sienna's tax bill is $1,210 (including Kiddie
  Tax).
Earned Income from Chores and Babysitting

• Recommended Kiddie Tax Termination Strategy:

• Have Sienna earn $4,000 from household chores
  performed for her parents and from babysitting for
  neighbors and friends of the family.
Earned Income from Chores and Babysitting
• Results after Strategy:

• Sienna's standard deduction jumps to $4,300.

• She can make a $4,000 deductible IRA contribution.

• Results: Sienna's tax for 2008 is $245 (saving $965 in taxes).

• Conclusion: By adding earned income and making a deductible
  IRA contribution, the Kiddie Tax was terminated.

• Bonus Conclusion: The IRA generally won't affect college financial
  aid eligibility.

• Bonus Conclusion: If $4,000 is put in Sienna’s IRA for five years, it
  will be worth $394,000 at age 60 (assuming a 7% return).

				
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