In 2010, a child’s income over $1,900 will be taxed at the parents’ rate. Even if a child is subject to this so-called “kiddie tax,” there may still be a tax benefit from transferring appreciated assets to a child.
Suppose you plan to sell $5,000 worth of mutual fund shares, and that you would have a $1,800 long term gain on the sale. You could give those shares to your 13-year-old daughter. She could sell the shares and owe zero tax this year, while you would owe the IRS $270, at a 15% rate, if you sold them yourself.
By using similar tactics each year that your children are under age 19, your total tax savings can be substantial. You also can save tax by shifting income producing assets such as taxable bond funds to your children. There are two problems, though:
* College aid. The more assets your kids have in their own name, the less financial aid they’ll receive.
* Control. Assets transferred to youngsters in order to realize tax benefits will pass outright to the child, generally at age 21 or younger.
Those issues might not be problems, though. While your are still custodian of your child’s assets, you can use the money in the child’s name for things that benefit the child, such as private school tuition. Assets that eventually pass to the youngster might be used to pay college expenses.
