Understanding Tax Terms: the kiddie tax

What you know can help you Category: Your Income

The term "kiddie tax" was introduced by the Tax Reform Act of 1986. The IRS introduced this rule to keep parents from shifting their investment income to their children and have this income taxed at their child's lower tax rate. The law requires a child's unearned income (generally dividends, interest, and capital gains) above a certain amount ($2,000 in 2013) to be taxed at their parent's tax rate. Here is what you need to know. Who it applies to Children under the age of 19 Children under the age of 24 if a full-time student and providing less than ½ of their own financial support Children with unearned income above $2,000 Who/What it does NOT apply to Earned income (wages and self-employed income from things like babysitting or paper routes). Children that are over age 18 and have earnings providing more than ½ of their support. Older children married and filing jointly Children over age 19 that are not full-time students Gifts received by your child during the year How it works The first $1,000 of unearned income is generally tax-free The next $1,000 of unearned income is taxed at the child's (usually lower) tax rate The excess over $2,000 is taxed at the parent's rate either on the parent's tax return (Form 8814) or on the child's tax return (Form 8615) What to know/do now Maximize your low tax investment options. Look to generate gains on your child's investment accounts to maximize the use of your child's kiddie tax threshold each year. You could consider selling stocks to capture your child's investment gains and then buy the stock back later to establish a higher cost basis. Be careful where you report a child's unearned income. Don't automatically add your child's unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit. Leverage gifts. If your children are not maximizing their tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child's financial aid when approaching college age years. Properly managed, the "kiddie tax" rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

2014 Social Security Benefits Announced

The Social Security Administration recently announced monthly social security and supplemental security income benefits (SSI) will increase in 2014 by 1.5%. This increase is based upon the Consumer Price Index over the past 12 months ending in September 2013. In addition, other figures based on the national average wage index will also be changed. A recap of the key amounts is outlined here: 2014 Key Social Security Benefits What does it mean for you? Up to $117,000 in wages will be subject to Social Security Taxes (up $3,300 or $205 in additional Social Security tax per employee and per employer) The average Social Security retirement beneficiary will receive an additional $228 in 2014. For all retired workers receiving Social Security retirement benefits the average monthly benefit of $1,275/mo. in 2013 will become $1,294/mo. in 2014. SSI (Supplemental Security Income) is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married). A full-time student who is blind or disabled can still receive Supplemental Security Income (SSI) benefits as long as earned income does not exceed the student exclusion amounts listed above. Social Security & Medicare Rates After temporary payroll tax rate cuts that ended in 2012, the rates do not change from 2013 to 2014. Note: The above tax rates are a combination of 6.20% Social Security and 1.45% for Medicare. There is also a Medicare .9% wages surtax that began in 2013 for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please recall that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.