The “kiddie tax” prevents high-net-worth individuals from avoiding taxes by shifting investment assets into their children’s names. In 2013, “children under age 20 and full time students living with the parents will pay income taxes at the parents highest marginal tax rate on all unearned income above $2,000.” But there are methods of avoiding the kiddie tax or at least minimizing it.
The easiest way to avoid the kiddie tax is to ensure that the unearned income the child receives does not exceed $2,000. This can be accomplished by limiting gifts to those assets that are non-interest bearing or that pay no dividends, such as raw land.
Another way to avoid the kiddie tax is to create a 529 savings account. If the assets are going to be used for qualified educational expenses, all gains and income in a 529 savings account are tax-deferred and then tax-free.
Other options include U.S. savings bonds and tax-deferred annuities. No matter what method is used to avoid the kiddie tax, high-net-worth individuals should always be aware of the risk of transferring assets to children and strongly consider the use of a trust to control the flow of money.
TO THE EXTENT THIS ARTICLE CONTAINS TAX MATTERS, IT IS NOT INTENDED NOR WRITTEN TO BE USED AND CANNOT BE USED BY A TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER, ACCORDING TO CIRCULAR 230.
*RANDALL A. DENHA, J.D,, LL.M., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha is recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning; a Five Star Wealth Planning Professional and a New York Times Top Attorney in Michigan. Mr. Denha can be reached at 248-265-4100 or by email at rad@denhalaw.com
