Watch Out for the Kiddie Tax
Shifting income to your children to take advantage of their lower tax rates may appear to be a good idea, but make sure you first know how the "kiddie tax" rules apply.
How It Works
The kiddie tax rules come into play when a child has taxable unearned income (as opposed to earned income from a job) above a certain limit ($2,100 in 2017). The rules affect children under age 18 and children who have earned income that is no more than half of their support and are either age 18 or full-time students under age 24.
Once the tax is triggered, the following rules generally apply:
- The child's standard deduction is $1,050 (in 2017)
- The next $1,050 of unearned income is taxed at the child's rate
- Unearned income exceeding $2,100 is taxed at the parent's rate.
Example: Cheryl is in the 25% bracket and her 15-year-old son, Dave, has no income other than $2,400 in investment income. Dave's A standard deduction shields the first $1,050, the 10% rate applies to the next $1,050, and Cheryl's marginal rate applies to the remaining $300, for a total tax of $180. Alternatively, if Cheryl had retained the investment income, she would have paid 25% of $2,400, or $600.
Is It Worth It?
Tax savings are possible, but consider that a second investment account may incur added expenses. Also, assets held in a child's name may reduce future financial aid awards.
Talk to us about your specific situation and potential tax-favored alternatives, such as a Section 529 college savings account.
2017 Retirement Plan Limits
Low inflation rates have resulted in few cost-of-living adjustments being made to the contribution limits for retirement plans in 2017. Following are some highlights.
Defined contribution plans.
The dollar limit on salary deferrals to 401(k), 403(b), and most 457 plans remains unchanged at $18,000. Catch-up contributions (available to participants age 50 and older if their plan allows) remain capped at $6,000.
The limit on total annual additions (employer and employee contributions plus any reallocated forfeitures) to a defined contribution plan account increased from $53,000 to $54,000.
The limits on employee contributions and catch-up contributions remain at $12,500 and $3,000, respectively.
Individual retirement accounts (IRAs). The limits for contributions and catch-up contributions to traditional and Roth IRAs remain unchanged at $5,500 and $1,000, respectively.
Individuals who contribute to traditional IRAs and have access to a workplace retirement plan (whether their own or through their spouse's plan) will see minor changes in the income-level phaseout ranges that apply for purposes of making deductible contributions. The ranges, which are based on modified adjusted gross income, are:
- $62,000 to $72,000 for single taxpayers and heads of household covered by a retirement plan at work (up from $61,000 to $71,000)
- $991000 to $119,000 for married couples filing jointly when the spouse contributing to the IRA is also covered by a workplace retirement plan (up from $98,000 to $118,000)
- $18600 to $196,000 for married couples filing jointly when the spouse contributing to the IRA is not the spouse with the workplace retirement plan (up from $184,000 to $194,000)
The new income-level phaseout ranges for Roth IRA contributions are $186,000 to $196,000 (married filing jointly) and $118,000 to $133,000 (single and head of household).
The general information in this publication is not intended to be nor should It be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.