One way to trim your tax bill is to shift income to your children, who have little or no taxable income. You could give them taxable bonds, for example, or give them assets you are about to sell at a gain. However, the “kiddie tax” limits the amount of income you can shift in this manner.
The kiddie tax applies to unearned income of the following taxpayers:
* All youngsters under age 18.
* Eighteen-year-olds, if their earned income is less than half of the amount spent on their behalf during the year.
* Full-time students under age 24, if their earned income is less than half of the amount spent on their behalf.
In 2011, those individuals owe no tax on unearned income up to $950. The next $950 of unearned income will be taxed at low rates. Unearned income in excess of $1,900 is taxed at the parent’s rate.
Thus, it might make sense to transfer assets you are going to sell at a profit to your children, as long as the profit each child reports in 2011 is no more than $1,900. Such gains probably will be eligible for the 0 percent tax rate in 2011.
