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Show Rules change on 'Kiddie Tax' By KENNETH J. ROSE Business Counselor Rose & Associates The new so-called "Kiddie Tax," part of the 1986 Tax Reform Act focuses on principally two aspects of your income taxes, deductions de-ductions for dependents, and the tax rates for those dependents. Under the old tax laws it was possible to get two personal exemptions ex-emptions for one person, if that person happened to be eligible to be claimed as a dependent on another taxpayer's tax return. Under the current tax rates that means that a single dependent could earn up to $6,440 before he had to pay any taxes. This would be consumed by a personal exemption exemp-tion of $1,900, a standard deduction deduc-tion of $2,540 and an IRA contribution contribu-tion of $2,000. This year that deduction is only allowed on one tax return. If you take it as a parent, your dependent will not be allowed to take the exemption ex-emption on his or her tax return. In most cases, since the parent will be in the higher tax bracket, it will be better to take the deduction on the parent's tax return and pay the lower tax rate on the dependent's return. The other aspect of the "Kiddie Tax" focuses on the tax rates themselves. Under the old tax laws an effective way of avoiding higher tax rates was to divert some of the income to dependent children. The taxpayer would simply gift up to ten thousand dollars (twenty thousand dollars for a married couple cou-ple filing a joint return) a year to the minor, which was put in a high-interest high-interest bearing savings account in the dependent's name. The depen-) dent could have interest incomf and pay taxes at a much lower rate than the parent who is in a higher tax bracket. Another similar method would be to make the dependent a minor-CONTINUED minor-CONTINUED ON NEXT PAGE |
