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Transferring Investments to Your Children?
New IRS "kiddie tax" rule restricts the tax benefits

Beginning with the 2006 tax year, children, under the age of 18 who have unearned income in excess of $1,700, are taxed at their parent’s higher rate.

Previously, this rule only applied to children who were under the age of 14.

Some parents who owned investments with unrealized capital gains previously would transfer an investment to their child age 14 or older and let the child sell the asset to pay tax at the child's lower rate.  Now that technique cannot be used until the child reaches age 18.

This new rule does not apply to married children who file a joint return, or to distributions from certain qualified disability trusts. Generally, unearned income includes interest and dividend income, capital gains, taxable social security benefits, and pension distributions.
 

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