When you open investment or savings accounts for your young children, you’ll have to cope with the “kiddie tax.” In 2005 as in 2004, children younger than 14 can receive as much as $800 in tax-free income from interest, dividends, or capital gains.
Above that level, the youngster’s investment income will be taxed at the child’s lower rate: 10 percent, or 5 percent on dividends and capital gains.
However, when investments and savings held by a child generate annual returns of more than $1,600, the “kiddie tax” takes effect. Subsequently, the child’s unearned income is taxed at the parents’ rate.
If you have children under age 14, then, keep their taxable income under $1,600 per year. That’s not hard to do these days: $50,000 earning 3 percent yields only $1,500 in interest income.
More investment income–capital gains, for example–can be deferred until after the child turns age 14 and the kiddie tax no longer applies.
