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The Tax Prophet Newsletter   Issue # 49 May, 2007

REDUCE TAXES!
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In This Issue:
Introduction
Kiddie Tax
Effective Date
Alternatives
Conclusion


Congress Shafts Families
Saving for College


Introduction

Families who transferred assets to their children for their college education recently received a rude shock when Congress raised the "kiddie tax" to age 24 for full-time students.

The brunt of this $1.6 billion dollar tax increase will be felt by middle and upper middle class families.

This new tax makes hypocrites of those politicians who rail against tax increases, then sock it to the middle class, including our President, who recently signed the bill into law.

Kiddie Tax

The kiddie tax (which should now be called the "young adult" tax), used to apply to children under age 14. It taxes a child's income at his or her parent's tax rates (a maximum of 35% federal), instead of treating the child as a separate taxpayer whose tax rate is usually 10% to 15%.

The new law will apply the kiddie tax to unearned income for children under age 24, if the child is a full-time student. Otherwise, the kiddie tax terminates when the child attains age 18.


Effective Date

Fortunately, the new law will take affect in 2008, which means children 18 or over may still sell assets through 2007 and pay taxes at their lower tax brackets. For taxpayers in the 10% or 15% tax brackets, the long-term capital gains rate is only 5% for 2007.

Note: The new law does not affect transfers to elderly parents or other relatives who may be in lower tax brackets.


Alternatives

The new law should boost the popularity of 529 college-savings plans, because investments in these plans are not subject to the kiddie tax. Assets held in a 529 plan grows tax-free and, in general, withdrawals are tax-free, as long as the money is used for higher education.

Another consideration: Invest a child's money in investments that generate little or no taxable income, such as municipal bonds or growth stocks.


Conclusion

By raising the kiddie tax, transfers of appreciating assets to children will not produce tax savings after 2007. The 529 plans now become the investment of choice for families saving money for college.

In any event, your child should consider selling appreciated assets this year to take advantage of the temporary 5% long-term capital gains tax rate.



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All contents copyright 2007 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.