Shifting Income
to Your Children May Save Taxes
How to Take Advantage of Your Child's Lower Tax Bracket
The strategy of putting investment property in your
children’s names can still work for you even though your child may be
under the age of 14 and subject to the kiddie tax.
First, the kiddie tax does not apply if your child
reaches the age of 14 before the end of the year. Even then, chances are
your child will be in a lower tax bracket than you are. The long-term tax
savings will help when the time comes to start paying for their college
education.
Second, current transfers can pay off in later years.
You are permitted to gift up to $11,000 annually ($22,000 if you are
married) to each individual without incurring a gift tax liability. This
allows you to gradually transfer a sizable portion of your estate to
family members who are in a lower tax bracket.
If you own your own business, you can hire your children to work for you.
Earned income is not subject to the kiddie tax rules, and paying them a
wage offers another means for transferring taxable income to a lower tax
bracket family member.
If your child is under the age of 14, unearned income such as interest,
dividends, and gains from the sale of property will be taxed at your rate.
The first $750 of unearned income is not taxed. The 10% tax rate applies
to income between $751 and $1,500, with any excess taxed at your rate.
Talk to your tax professional about specific income
shifting strategies that might work for you.
