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Even
with having under age 14 children’s unearned income taxed at the
parents’ rate, you might still want to consider shifting some income to
your children. The “kiddie tax” does not apply to children that are 14
and up. Because they are probably still being taxed a lower rate than
yourself at that time, you can still benefit.
Furthermore,
other advantages for shifting income to children under fourteen include: the
fact that income will not begin to be taxed at the parents’ rate until the
child has received income over $1,600 that is unearned; if you are
self-employed, you can employ them in your business, pay them a reasonable
wage for the work they have performed (it is now earned income) and take a
business deduction for the wage expense; you will still reap benefits of
transferring $11,000 per year per person to them which will escape gift and
estate tax to you (and will be taxed at a lower rate when they do turn 14
years old).
If
the child under 14 will not actually be realizing income each year from an
investment (because an asset is not being sold or is not paying anything),
then there will be no kiddie tax in that instance since no taxable income
was received.
If
you wish to make this election for children under 14 years, you need to
determine that their income is only from dividends, interest, and capital
gain distribution that is more than $800 (or it won’t be taxed anyway).
This may reduce or increase some itemized deductions (if you are itemizing),
but it will depend on the areas in which you are able to itemize in order to
make a determination.
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