Congress passed a new bill in 2007 and one of the revenue generators included to offset the tax breaks provided by the bill is the breadth of "kiddie tax" applicability.
First, here is some brief history on the prior law so we can see the effects of the change. Generally, this tax applied to your children under age 14 who had more than a stated amount (i.e.: $1,600 in 2005) in unearned (investment) income. Essentially, the rules take the investment income of the child above this amount and tax it at the parents' (higher) tax rate. Accordingly, while some savings on up to $1,600 of income for that particular year was possible, substantial tax savings might be greater if assets were transferred to older minor children. Then the law changed for 2006 & 2007 to include children under 18 with essentially the same rules. And now, the law will tax those up to and including age 18.
Under the 2007 Small Business Act, the kiddie tax is expanded to apply as of 2008 where:
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the child turns age 18, or if a full-time student, turns age 19-23, before the close of the tax year;
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the child's earned income, generally, wages, and salaries for personal services, doesn't exceed one-half of his or her support;
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the child has more than the inflation-adjusted prescribed amount of unearned income (i.e., $1,700 as of 2007);
- the child has at least one living parent at the close of the tax year; and the child doesn't file a joint return for the tax year.
