Effective in 2006, the age at which a child is no longer subject to the "Kiddie Tax" has been raised from 14 to 18. Here is how it works:

For 2006, the first $850 of investment income is not taxed to children under 18 years of age. The next $850 of investment income is taxed at the child’s lowest rate, 5% - 10% depending on the type of investment income it is. Investment income in excess of $1,700 is taxed at the parent’s top marginal bracket for each type of income.

The year in which the child reaches age 18, they are treated as a single taxpayer. Earned income from a part time job is not subject to these limitations regardless of the child’s age.

Because of this change, income shifting to children ages 14-17 is no longer a valid income tax planning strategy. If your child holds investments, it may be prudent to invest in nontaxable items, such as low dividend paying stock that is expected to appreciate in value, or municipal bonds or funds. If the investments are earmarked for college, a 529 plan may be a logical alternative.

While income shifting to a child who hasn’t reached age 18 may not be a sensible income tax strategy, it may be a wise estate tax planning move if you expect that your estate will be taxable.

If you need further information, or would like to speak to a CPA or financial advisor about tax planning strategies that fit your personal situation, please contact call us toll-free at 888-363-7147.