6 Kiddie Tax Strategies for Parents
Kiddie Tax Update: Strategies to Minimize the Bite in 2024
The Kiddie Tax can significantly impact a family’s tax burden, especially when children receive substantial unearned income. While designed to prevent tax avoidance, it can be a complex and potentially costly provision. Understanding the rules and implementing effective strategies can help mitigate its effects.
How the Kiddie Tax Works
The Kiddie Tax applies to children under 19 (or under 24 if a full-time student) who have unearned income exceeding a certain threshold. This income includes dividends, interest, and capital gains. Once the threshold is surpassed, a portion of the child’s income is taxed at the parents’ top marginal tax rate, rather than the child’s lower rate.
For tax year 2024, the standard deduction for children is $1,250. This means the first $1,250 of unearned income is tax-free. Any income above this amount is subject to the Kiddie Tax.
Kiddie Tax Strategies
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Monitor Income Closely: Keep a watchful eye on your child’s income throughout the year. If you anticipate their income exceeding the $1,250 threshold, consider timing capital gains realizations or other income-generating events to minimize the impact of the Kiddie Tax.
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Prioritize Tax-Deferred Growth: Invest in assets that offer tax-deferred growth, such as growth stocks or municipal bonds. While these investments will eventually be taxed, delaying the realization of income can help reduce the immediate impact of the Kiddie Tax.
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Leverage Roth IRAs: Encourage your child to open a Roth IRA once they start earning income. Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals in retirement are tax-free. This can be a valuable tool for long-term wealth building.
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Maximize 529 Plan Contributions: Consider contributing to a 529 plan for your child’s education. Contributions to 529 plans often offer state tax deductions, and qualified withdrawals for education expenses are federal tax-free.
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Explore Municipal Bonds: Municipal bonds can be a beneficial investment for children, as the interest income is generally exempt from federal income tax. This can help reduce or eliminate the Kiddie Tax altogether.
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Encourage Earned Income: While not directly related to the Kiddie Tax, encouraging your child to earn income through part-time jobs or starting a small business can help build financial responsibility and provide a valuable income stream.
Additional Considerations
Consult a Tax Professional
Tax laws can be complex, and it’s essential to seek advice from a qualified tax professional to ensure you’re taking full advantage of available strategies and minimizing your tax liability.
State Taxes
While this article focuses on federal taxes, be aware that state tax laws may also impact your child’s income. Consult with a tax professional to understand the state tax implications.
Regular Review
Tax laws and your financial situation can change over time. It’s essential to review your child’s financial plan regularly to ensure you’re making the most of available opportunities.
By carefully considering these strategies and seeking professional advice, you can effectively manage the Kiddie Tax and optimize your child’s financial future.
Questions?
Seeking professional guidance from a Brady Ware tax advisor can help tailor these strategies to your specific situation and maximize kiddie tax minimization. Don’t let this tax bite take a bigger chunk than necessary!
Questions?
Mark is a trusted advisor to his clients and specializes in providing tax compliance and advice, as well as financial problem solving. Mark is a problem-solver who embraces complex issues. His ability to leverage his expertise with his network of other specialists across Brady Ware provides value to accomplish the client’s unique goals.
Mark Kassens, CPA
765.935.8202