It’s June and there is already a new tax act and it may affect your older kids’ tax returns. On May 25th, President Bush signed legislation that provides funding for the Iraq war and raises the federal minimum wage. In that legislation were tax changes to increase revenue to balance the funding. One of those tax changes extended the age range of the “kiddie tax ” to under 24. For the 2nd time in just over a year, this age range has been extended.
In prior years, if a child was under 14 and had more than $1,700 in investment income (interest, dividends, capital gains), the child’s income was taxed at the higher parents’ tax rate. For 2006, that top age was changed to “under 18.” And now, with the Small Business and Work Opportunity Tax Act 2007, the age range has been extended to “under age 19 or if a full-time student, under age 24.” This age extension takes effect with the 2008 tax returns. So your full-time students’ 2007 tax returns are safe.
If you are wondering why Congress bothered to extend this age range, here’s why. In 2008, 2009, and 2010, the capital gains tax rate for tax returns in the lower tax brackets (10% & 15%) will be zero. Yes, I said zero tax rate! There have been reports that wealthy families were planning to transfer ownership of assets, like stocks, that have gone up in value to their older dependent children who were no longer caught in the ‘kiddie tax.” These children (with a lower tax bracket) would then sell the stock in 2008 for zero tax on the gain. Congressional staffers estimate this change would raise $1.4 billion over a decade of tax returns.
Now, let’s go back to the details on the extended age range. If your child turns 19 (or 24, if a full-time student) before the end of the tax year (starting with 2008), then that child does not fall under the “kiddie tax.” Also if the child’s earned income (wages, tips, professional fees, etc) exceeds ½ of their support, he/she is not hit with the “kiddie tax.”
It is assumed that the definition of a “full-time student” refers to a person who is a full-time student at an educational organization during each of 5 months of the calendar year.
For more details, TaxAlmanac – New Legislation
To decide if your child needs to file a tax return, check out Does My Child Need to File a Tax Return?
For further information on calculating the tax on your child’s tax return, see Can Your Child’s Tax Return Be Complicated?