Full-time Students Now Subject to the “Kiddie Tax”

Beginning January 1, 2008, a provision of the Small Business Tax Relief Act of 2007 that President Bush signed into law on May 25, 2007 will increase the age range for purposes of determining the “Kiddie Tax”. Under these provisions, a child’s unearned income, which includes investment income, above a certain amount ($1,700 for 2007) is taxed at the parents’ presumably higher tax rate. The new law increases the age range from age 17 or younger to age 18 or younger. More significant for many of our clients, this rule will begin to apply to a “child”, up to age 23 while a full-time student, where that child’s earned income isn’t more than half of that year’s support. Just imagine the reporting shenanigans that could arise around that rule. This is not likely to significantly change the merits of gift programs for your young adult children, but we’re eager to help you avoid the surprise factor as we optimize those gift arrangements.