Avoiding the Kiddie Tax

The “kiddie tax” prevents high-net-worth individuals fromavoiding taxes by shifting investment assets into their children’s names.  In 2013, “children under age 20 and full timestudents living with the parents will pay income taxes at the parents highestmarginal tax rate on all unearned income above $2,000.”  But there are methods of avoiding the kiddietax or at least minimizing it.

The easiest way to avoid the kiddie tax is to ensure thatthe unearned income the child receives does not exceed $2,000.  This can be accomplished by limiting gifts tothose assets that are non-interest bearing or that pay no dividends, such asraw land.

Another way to avoid the kiddie tax is to create a 529savings account.  If the assets are goingto be used for qualified educational expenses, all gains and income in a 529savings account are tax-deferred and then tax-free.

Other options include U.S. savings bonds and tax-deferredannuities.  No matter what method is usedto avoid the kiddie tax, high-net-worth individuals should always be aware ofthe risk of transferring assets to children and strongly consider the use of atrust to control the flow of money.

See John Napolitano,Wealth Planning Across the Ages,WealthManagement.com, May 3, 2013.