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Plan Now for "Kiddie Tax" Changes in 2008
Posted October 2007

A well thought-out intrafamily gifting strategy is an important part of tax-wise income- and estate-tax planning. Passing assets on to family members can yield significant benefits:

• It reduces the donor's gross estate. You can give up to $12,000 per donee each year free of gift tax—$24,000 if you split gifts for tax purposes with a spouse. Any amount above these limits will be subject to federal gift tax, but no gift tax will be due until you have exhausted a $1 million lifetime exemption. 
• Gifts of appreciated property can shift tax burden to others in lower tax brackets. Often, it can be a good idea to give a family member in a lower tax bracket highly appreciated property and let the recipient sell it. The resulting gain will be taxed in the recipient’s lower tax bracket—in most cases.

However, some gains are taxed at the parents' higher rates—if property is given to children—because of the so-called “kiddie tax”—and recent changes extend its reach. Prior to 2006, except for certain small exemptions, gains were taxed at the parents' rates if the recipient child was under 14. Last year, that extended to children up to aged 17 and next year it will increase to 18—and up to 23—if the child is a full-time dependent student:

Charitable Option Sidesteps the Tax

If you are planning on making a gift to a child who next year will fall under the scope of the expanded “kiddie tax,” consider doing it now.

You also have another choice to avoid tax on unrealized gains. Instead of cash, use long-term appreciated capital-gain property—such as stocks or real estate—to fund your charitable gifts this year—and give the cash to the children. Relieved of any potential capital-gain tax, the children will receive even more value and you will avoid all tax on your paper gain.

Example—Joe and Mary T have used the gift-tax annual exclusion to advantage to shift assets to their son Tom, now 20, during his first two years of college. They plan to give him $12,000 next year, and fund the gift with appreciated stock that has doubled in value. They assume Tom will owe little or no tax when he sells the stock.

When they learn that the “kiddie tax” changes next year will cause any gain on the sale of stock to be taxed at their 15% rate, Joe and Mary decide to use the stock to make their annual gift to the Nebraska Cultural Endowment and give Tom cash. The gift of stock to the Nebraska Cultural Endowment is deductible at full fair-market value and we will not pay any tax on the gain when the stock is sold.

Please contact us if we can be of any assistance in this process.

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