In May of this year, Congress passed and the President signed The Small Business And Work Opportunity Act. One of the changes made by the Act was to extend from age 18 to age 24 the period during which a child’s unearned income is taxed at the same marginal rate at which his parents’ income is taxed. There is an exception for the first $1,700 of unearned income and any earned income, such as from summer jobs, which is taxed at the child’s own rate. The extension to age 24 is limited to those circumstances where the child is a full-time student. If a child over the age of 18 is not a full-time student, then his unearned income is taxed at his own marginal rate.
This change further diminishes the benefit of income splitting transactions among family members. The dispersion of income producing assets among family members can be attractive because the maximum federal income tax rate of 35% is not reached for an individual taxpayer until his taxable income reaches $350,000. Thus, absent the kiddie tax provisions, considerable tax savings can be achieved by a family through the transfer of income producing assets to children, who would most often pay a lower rate of tax on the income produced by those assets than would have been paid by the parents.
Prior to 2006, the special kiddie tax rules applied only through age 13. In 2006, they were extended from 13 to 17 and then this year, they were extended by The Small Business And Work Opportunity Act up to age 24. The transfer of income producing assets can still be beneficial where the children are over 24 or over 18 and out of school.