Did you know that you could sometimes save taxes by transferring assets into your children's names? This tax technique, called income shifting, seeks to take income out of your higher tax bracket and place it in the lowest (15%) of your children.
"Kiddie Tax" rules only apply to your children who are under 14 years old. Essentially, this takes the investment income of the child above $1,500 and taxes it at the parent's higher tax rate. Accordingly, while some savings (up to $1,500 of income) can still be enjoyed through this manner of income shifting, substantial tax savings aren't available. A dependant child cannot claim a personal exemption and is limited to a $750 standard deduction.
Under the "Kiddie Tax", parents can elect to include the child's income on their own return. This avoids the need for a separate return for the child, but generally doesn't change the tax on the child's unearned income, which is still taxed at the parent's tax rate.
You can try to avoid the "Kiddie Tax" on unearned income over $1,500 by some more shifting of investments or making other adjustments.
