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NewswireToday - /newswire/ -
Woburn, MA, United States, 06/14/2007 - The Small Business and Work Opportunity Tax Act, signed into law on May 25th, includes a provision increasing the "Kiddie Tax" age from 17 to as high as 23 for children who are full-time students, effective January 1, 2008.
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On May 25th, President Bush signed the Small Business and Work Opportunity Tax Act into law. For the second time in just two years, the Kiddie Tax, introduced as part of the massive Tax Reform Act of 1986, was made even broader.
Prior to 2006, any unearned income above a certain threshold earned by a child under the age of 14 was taxed at the parent's tax rate. In 2006, the Tax Increase Prevention and Reconciliation Act of 2006 expanded the Kiddie Tax to include children 17 or younger who earn more than $1,700 (in 2007) in interest, dividends, capital gains, and other non-wage income.
This year, as part of the Small Business and Work Opportunity Tax Act signed into law on May 25th, the Kiddie Tax was bumped up to age 18, and up to age 23 for children who are full time students, for a child whose earned income does not exceed more than half of that year's support, effective 2008.
"Understanding how your child will be taxed is very important when determining how to best save money for their college education," explains Andrew Schwartz CPA, founder of FindAGoodCPA.com, a site where taxpayers can locate a CPA in their state who specializes in their specific tax issues. "Now parents who managed to build up an education nest egg might be hit with higher tax bills throughout their children's undergraduate years."
For 2007, the first $850 of net investment income earned by a child isn't taxed, and the next $850 is taxed at a rate of either 5% or 10%, depending on the type of income earned. Any additional income is taxed based on the child's age as follows:
Children under the age of 19: A child's net investment income earned during the year that exceeds the $1,700 threshold (in 2007) is generally taxed at the parent's marginal tax rate.
Children between the age of 19 and 23: If a child is a full-time student whose earned income does not exceed more than half of their support, a child is taxed under the Kiddie Tax rules.
Children over the age of 24: Upon reaching the age of 24, a child's income is taxed using the same tables that apply to single adults. For 2007, the first $7,825 of net taxable income is taxed at 10%, and then the next $24,025 is taxed at 15%. As with all taxpayers, corporate dividends and long-term capital gains are taxed at a lower rate.
"Now that the Kiddie Tax applies to children through age 23, it makes even more sense for parents to consider saving for a child's college education either in their own name or within a 529 Plan or Coverdell Education Savings Account (ESA)," says Schwartz.
"There are other variables to factor in as well. Investments made in a child's name tend to reduce the amount of financial aid available to pay for college. Plus, if a child receives a full scholarship or decides not to go to college, any money saved in that child's name becomes his or her property upon reaching the applicable age of majority in their home state. And don't forget that the Pension Protection Act of 2006 made tax-free distributions from 529 plans permanent."
About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of FindAGoodCPA.com, a site where taxpayers can interact with CPAs and EAs based on each professional's specialty. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.
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