Kiddie Tax for 2006
One of my first and most popular posts was about using custodial accounts for your kids to shelter tax on non qualified dividends and interest. Here is an updated version for the 2006 tax year.
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 $850 per year of interest and dividends tax free and another $850 taxed at only 10%. Anything over $1,700 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 are entitled to 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 @ $1700 of income per child, I'll save $782 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.