Tuesday, December 06, 2005

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:
  1. I created a custodial account for each of my children @ E*Trade (all of my accounts are with E*Trade)
  2. My wife and I made tax free gifts to each of their accounts - each kid got a total of $15k
  3. 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)
  4. 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.
  5. 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.

7 Comments:

At 11:21 PM, Blogger ncnblog said...

Cool post...
I might just do this next year...
When you say "for their benefit" could that be clothing, food, stuff like that? Just everyday stuff they need?
Thanks
ncnblog.com
(I "rolled you")

 
At 6:04 AM, Blogger Early Riser said...

ncn,

Thanks for the feedback.

According to my research, you cannot use the money to provide support that you are legally obligated to provide... whatever that means. I would say that food, clothing and shelter are out. However, I'm including toys, violin lessons, sports fees, etc. in my record keeping of where their money gets spent.

As always... I'm not a tax professional and you should validate my advice with someone who is.

Thanks again,

EarlyRiser

 
At 6:39 PM, Anonymous Anonymous said...

Be sure to spend the money you give to your kids. Or at least use the ways to "hide" the money when the kid goes to college.

33% of the money in your kids name againt him for financial aid purposes while only 5% for you. Kids these days have a tendency to make stupid financial desisions, be sure to teach them about money.

Also, open up a kid's saving account. Some banks give an better rate for kids. For example, the following bank gives 10% interest on the first $500 for each kid(has to be under 16 yrs old): http://bankdeals.blogspot.com/2005/12/10-savings-account-for-kids.html

 
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At 12:47 PM, Anonymous PENNY STOCK INVESTMENTS said...

Another day another tax.

 

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