My Best Tax Move for 2005 - The Kiddie Tax
*** This is NOT investment advice!***
If you have young dependent kids and significant unearned income (interest, dividends, etc.), you can convert a portion of that high taxed income to tax free with a few clicks of a mouse. Here's why: your children can earn up to $800 per year of interest and dividends tax free and another $800 taxed at only 10%. Anything over $1,600 will be taxed at your rate.
Here's what I did:
- I created a custodial account for each of my children @ E*Trade (all of my accounts are with E*Trade)
- My wife and I made tax free gifts to each of their accounts - each kid got a total of $15k
- I invested their new found money into high dividend stocks such as FRO, SFI, ACAS (no need to put the money into stocks that allow the 15% dividend tax - I went for maximum gross dividends)
- At tax time, I simply file a IRS Form 8615 for each kid on my return and the income gets tax at the reduced rate.
- With 2 kids @ $1600 of income per child, I'll save $736 in taxes just this year! (My marginal rate is 28%)
Words of caution:
- Always consult a tax adviser if you are unsure of how this would impact you
- When you give your children money, it's theirs... it can only be used to their benefit or you risk losing the tax benefit
- Just because it works for me, doesn't mean it will work for you.