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2008 investment income above $1700

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TinkerBelleLuvr

Senior Member
What is the name of your state? MI/FL

In the Wall Street Journal today, there was an article about trimming 2007 taxes. They mentioned a change for 2008 - I'm not sure if it will affect my 18yo daughter.

The exact verbage is:
A law enacted earlier this year will expand the reach of the kiddie tax, which generally requires a child's income above a certain amount to be taxed at the parent's higher rate. But this change won't take effect until next year, thus creating tax-saving opportunities this year for some families.

for 2007, investment income above $1700 for a child 17yo or younger typically is subject to tax at the parent's rate, assuming it's higher than the child's. Starting next year, the age limit generally will rise to kids who are 18, or full-time students over 18 but under 24. (The expanded provision won't apply to some kids with paid jobs.) Congress made the change after this column reported that some wealthy families were planning to take advantage of the separate tax change designed to benefit low-income taxpayers.

Since the higher age limit won't apply until next month, there is now "a small window of opportunity" for some people to transfer securities that have gone up in value over the years to kids 18 or older as of Dec. 31, 2007, and who will be subject to the kiddie tax next year, says ....
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The question is:
My daughter has stocks that I have been selling to pay for her tuition. I am the custodian. Technically, her funds are supporting her, so that neither her father nor I will able to claim her as a dependent. I will have her claim herself on her taxes for 2007. Neither one of us would be able to demonstrate that we pay over 1/2 her support. Will she be subject to this tax, since she will NOT be a dependent of either of us? My gut feel says NO. I could not find anything on the IRS website to give me guidance. I may be looking to sell some additional stocks this year, instead of in the summer of 2008.
 


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abezon

Senior Member
The current kiddie tax rules apply only to kids under 18 as of 12/31/2007. They get taxed at their own tax rate. Starting in January, students under 23 will be taxed at their parents' rate on investment income unless they provide over half their own support from earned income. Thus, your daughter is exempt from kiddie taxes for 2007 but will be subject to them in 2008.

You should see a tax pro & financial advosor about whether to rebasis her appreciated stocks (sell & repurchase now) when she can pay 5% on most long term gains, or wait for next year when she'll have to pay your rate (probably 15%). You may also want to sell some loser stocks to offset gains.


An excellent article: http://www.smartmoney.com/taxmatters/index.cfm?story=20070907
 
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TinkerBelleLuvr

Senior Member
Why would she have EITHER parent's rate if she cannot be claimed by either parent in either 2007 or 2008? She is providing over half her support. Granted, I don't make that much - I qualify for EIC. Just curious.

Oh, and Abezon, I am a tax pro ... I just couldn't find the answer for this one. I'm just trying to figure out the best move to have the monies available for the summer/fall semesters of 2008. I've already made the sales for the Spring 2008 semester.
 
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abezon

Senior Member
Ginny J said:
Why would she have EITHER parent's rate if she cannot be claimed by either parent in either 2007 or 2008? She is providing over half her support.
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Because Congress said so. Greedy Bast*rds.

This change to the kiddie tax is intended to prevent rich families from transferring assets to children so the kids could sell the assets in 2008-2010 & take advantage of the 0% long term capital gains rate, if the kid is in the 10% or 15% tax bracket. Congress was specifically targeting kids who can't be claimed as dependents.

Now, she would be subject to kiddie tax rules based on the custodial parent's income. If that's you, & you claim EIC, you're likely in the 15% bracket anyway, so her kiddie tax rate in 2008 will probably still be 0%. She might have to pay tax at a higher rate on interest income, though.

Of course, this all assumes she has taxable income, since she'll get the standard deduction & personal exemption if she provides over half her own support in 2008. She can also claim education credits....

You may get the best of both worlds, where she claims herself to figure taxable income & education credits, but you still get to claim her as a qualifying child for EIC purposes. Nifty!
 
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TinkerBelleLuvr

Senior Member
Technically, her father was the custodial parent until she graduated in May. Because he is a deadbeat taxpayer, he WON'T file a return. He was 'self-employed', and by his statements would have had a net income of more than $400.28, so yes, he HAS to file a return. He was ordered by the judge to have filed his 2006 return by December 7th. I would bet a paycheck that still hasn't happened. We'll find out on the 18th.

We went thru a ton of hoopla, to have her changed over to me on FASFA. Now, she has been a legal Michigan resident all her life. I am a Florida resident. Anyway, I won't have my daughter anywhere near my tax return, because she will lose her Michigan residency and then will be out-of-state where she is.

Now, this leads me to the next question: what happens with all this lovely 'your parent's tax rate' when parent's won't either share the information, or are a deadbeat like my X that just won't file?
 
LdiJ

LdiJ

Senior Member
Ginny J said:
Technically, her father was the custodial parent until she graduated in May. Because he is a deadbeat taxpayer, he WON'T file a return. He was 'self-employed', and by his statements would have had a net income of more than $400.28, so yes, he HAS to file a return. He was ordered by the judge to have filed his 2006 return by December 7th. I would bet a paycheck that still hasn't happened. We'll find out on the 18th.

We went thru a ton of hoopla, to have her changed over to me on FASFA. Now, she has been a legal Michigan resident all her life. I am a Florida resident. Anyway, I won't have my daughter anywhere near my tax return, because she will lose her Michigan residency and then will be out-of-state where she is.

Now, this leads me to the next question: what happens with all this lovely 'your parent's tax rate' when parent's won't either share the information, or are a deadbeat like my X that just won't file?
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That is a problem, and one area where this law may get questioned in the courts. I don't think it meets constitutional muster. Its fine if the student is a dependent of their parents, but I think it totally fails if the student is NOT a dependent of their parents.

However, in your daughter's case she is going to have her standard deduction, her personal exemption, and education credits or deductions. You may want to try to structure her stock sales so that her gain plus any earned income does not exceed the total of those. Also, if she plans to work at all (part time or summers) you might try to have her structure things so that she can demonstrate that her earnings provide more than 50% of her support.

You know how much her housing costs are. If she can earn more than half of that, it may be demonstrable that she is providing more than 50% of her support.

You also may want to shift some of next year's stock sales to this year to at least reduce the problem for 2008.
 
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TinkerBelleLuvr

Senior Member
That is a problem, and one area where this law may get questioned in the courts. I don't think it meets constitutional muster. Its fine if the student is a dependent of their parents, but I think it totally fails if the student is NOT a dependent of their parents.

However, in your daughter's case she is going to have her standard deduction, her personal exemption, and education credits or deductions. You may want to try to structure her stock sales so that her gain plus any earned income does not exceed the total of those. Also, if she plans to work at all (part time or summers) you might try to have her structure things so that she can demonstrate that her earnings provide more than 50% of her support.

You know how much her housing costs are. If she can earn more than half of that, it may be demonstrable that she is providing more than 50% of her support.

You also may want to shift some of next year's stock sales to this year to at least reduce the problem for 2008.
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Thanks Ldij,

After having read the WSJ yesterday on their '10 ways to reduce our taxes' and some research, I've pretty much decided that I would sell enough stocks to get her thru 2008. I'm going to put some in CD's to mature as needed for her various semesters. I tread carefully though because of her scholarship also.

I also have the 529 avenue too; not that much, but it'll help.

My D was planning on working in the summer. I wouldn't "let" her work this semester (her first). I preferred to give her spending money each month (food & laundry $$); I felt that she needed to be get in the groove of school before diving into working while going to school.

I made it a point with my attorney for next week's court hearing that NEITHER parent was going to get the child in the future. He could sqwuak (sp) all he wants, but it was a case of "show me the tax return" :D:D:D He lost all credibility when he didn't cough one up by 10/29 for this year's financial aid. Stupid on his part because I was willing to give up arrearage in exchange for it.
 
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tranquility

Senior Member
I'm not a genius when predicting what the courts will decide, but because "children who are not dependents of their parents" is not a protected category, the courts will use "rational basis" as the constitutional test. That is, is the law a rational means to an end. (At least an end the government has a legitimate right to have.)

Abezon gave one "end" and I believe the law is rational to prevent parents transferring wealth to children to get their advantagous tax rate. That the law harms some minority (like children who are not dependents of their parents) is not a part of the decision as to if the law is constitutional or not, it only determines the test to be used.

I don't think the law will be determined to be unconstitutional.
 
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TinkerBelleLuvr

Senior Member
The problem will be when parents will NOT provide the child with the necessary info to file a correct return. Heck, I sent my daughter my transcripts for her to take them to the financial aid office to prove that what I filed for financial aid is really all I earn.

The IRS is setting up taxpayers who may want to do the right thing, but can't because you can't FORCE a parent to give this information to a child who is NOT a dependent.
 
LdiJ

LdiJ

Senior Member
tranquility said:
I'm not a genius when predicting what the courts will decide, but because "children who are not dependents of their parents" is not a protected category, the courts will use "rational basis" as the constitutional test. That is, is the law a rational means to an end. (At least an end the government has a legitimate right to have.)

Abezon gave one "end" and I believe the law is rational to prevent parents transferring wealth to children to get their advantagous tax rate. That the law harms some minority (like children who are not dependents of their parents) is not a part of the decision as to if the law is constitutional or not, it only determines the test to be used.

I don't think the law will be determined to be unconstitutional.
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You could be right, and I understand that perspective, but I am looking at it from the viewpoint that it tramples the rights of young, emancipated and independent adults. Their investment income could easily come from a source that has nothing to do with their parents. Think about it? It bothers me most for those young adults that are 21-23.
 
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TinkerBelleLuvr

Senior Member
Well, my daughter's funds were NOT from me ... I'm the poor one here ... Her dead grandpa and her grandma had given a small amount that I turned into some money over the years. So, my daughter is punished because of a gift that had NOTHING to do with 'hiding' money from the IRS. They gifted it so that she could go to college.
 
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TinkerBelleLuvr

Senior Member
Now, you could say that my daughter isn't completely independent. I have her covered on my health insurance. It doesn't cost me any extra to have her on it since I also cover her younger sister - the cost is the same whether it is one child or many children. I do help her out some, but it's not much since I don't have much. I guess at least it doesn't look like she'll get hit by much since my tax rate is so low.

I still am trying to figure out how they can FORCE a parent to give over information to a child to do their return when the children are independent. That will be an interesting test of constitutionality. I'll comply because my I love my daughter and will do what it takes to get her thru college. But, not every parent feels that the children have a right to their income tax info.
 
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tranquility

Senior Member
You could be right, and I understand that perspective, but I am looking at it from the viewpoint that it tramples the rights of young, emancipated and independent adults. Their investment income could easily come from a source that has nothing to do with their parents. Think about it? It bothers me most for those young adults that are 21-23.
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This does not make it a constitutional issue. This seems a legislative issue. That the Congress makes a tax law which is ill though out does not make it unconstitutional--it just makes it par for the course.
 
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TinkerBelleLuvr

Senior Member
So, it'll take some wealthy guy to have to go head-to-head with the IRS and their stupid rules. That is a case I would love to follow.

I'm still trying to figure out how they could 'audit' the student. Or the parent for that matter. Exactly what will they use to see if the parents/children obey the law? If neither return has information to tie them to the other?
 
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