Do you want to ensure that your child’s financial future is secure? Are you looking for ways to pass on your wealth without having to pay the kiddie tax? If so, you’re in luck! Creative Advising, a certified public accounting, tax strategy, and professional bookkeeping firm, is here to help.
At Creative Advising, we understand the importance of passing on your wealth to your children. That’s why we’re here to explain how you can avoid the kiddie tax by giving your child property instead of cash.
The kiddie tax is a tax that is imposed on the unearned income of children under the age of 18. The tax was created to prevent wealthy parents from transferring their wealth to their children in order to avoid paying taxes. Fortunately, there are ways to avoid the kiddie tax and pass on your wealth without incurring any additional taxes.
One way to avoid the kiddie tax is to give your child property instead of cash. By giving your child property, such as stocks, bonds, or real estate, you can pass on your wealth without having to pay any additional taxes.
At Creative Advising, our team of certified public accountants, tax strategists, and professional bookkeepers can help you understand the different ways you can pass on your wealth without having to pay the kiddie tax. We can help you create an effective plan that will ensure that your child’s financial future is secure.
Don’t let the kiddie tax prevent you from passing on your wealth. Contact Creative Advising today to learn more about how you can avoid the kiddie tax by giving your child property instead of cash.
Definition of Kiddie Tax
The Kiddie Tax is a federal tax imposed on the unearned income of children. It was created to discourage parents from transferring assets to their children in order to avoid taxation. Under the Kiddie Tax, the income of a minor is subject to the tax rates applicable to trusts and estates: lower than the tax rate applicable to parents on higher income. In 2020, the tax rates applicable to trusts are between 10% and 37% depending on the income level.
Can parents avoid the kiddie tax by giving their child property instead of cash? The answer is yes. By giving their child an appreciated asset, such as real estate, parents can avoid the burden of the tax and still provide a valuable asset. The child’s ability to pay lower taxes on long-term capital gains can help to offset any potential losses associated with the Kiddie Tax.
Parents should also consider other strategies for avoiding the Kiddie Tax when transferring assets to their children. For instance, they could establish a custodial account for their child and designate them as the custodian of the account. This allows the child to make their own financial decisions with the custodial account and avoid having to pay the Kiddie Tax. Another option is to establish a trust fund and appoint the child as the beneficiary. This allows the parent to maintain control of the account while still receiving the benefit of having their child shielded from the Kiddie Tax.
It is also important to consider the impact of the Tax Cuts and Jobs Act on the Kiddie Tax. The new law eliminates certain exemptions for children’s income under the Kiddie Tax, meaning that even more of their unearned income is subject to taxation. Parents should be aware of how these new regulations affect their ability to transfer assets to their children while avoiding the Kiddie Tax.
In summary, the Kiddie Tax presents a financial burden to parents who are looking to transfer assets to their children. Understanding the nuances of the tax and the strategies available to transfer assets can help parents avoid the tax and ensure their children receive the most value from their gift. By weighing the pros and cons of different strategies, parents can craft the best solution for their particular situation.
Tax Benefits of Giving Property to Children
As a tax strategy, parents may decide to give property instead of cash to their children. This idea has several potential advantages. First, gifting property to a child, instead of cash, can reduce the parent’s taxable income since the gift isn’t included in the parent’s gross income. Second, if the parent retains the right to income generated by the property (rent, dividends, etc.), then the parent can continue to benefit from the asset even when it is owned and beneficially used by the child.
Additionally, if the child takes ownership of the property or assets, the parent may qualify for an annual $14,000 annual gift tax exemption. This mechanism allows a parent to make multiple gifts to one or more children over the same time period, without incurring any gift taxes. Last, the parent can take advantage of the rules of the stepped-up basis. As outlined in the IRS Tax Guide, if the gift is at least one year old and the parent has held it for more than one year, then the child can count the parent’s original cost as the basis for calculating gains and losses from the sale of the property. This allows the child to avoid paying taxes on any appreciation that occurred before the parent gifted him or her the property.
The decision to give property to a child should not be taken lightly. It is important for parents to consider the strategy’s long-term implications and their own particular financial situation. In some cases, a trust can be an advantageous way to transfer assets to their children, since the assets in the trust can be managed and distributed in accordance with agreement between the parent and beneficiary. Estate planners and tax professionals can be consulted to discuss the most appropriate and tax advantageous strategy for parents looking to provide financial help for their children.
Strategies to Avoid the Kiddie Tax
The tax code imposes an additional tax on money earned by children, known as the kiddie tax. While this law has greater implications for high-income families, there are still other financial strategies that parents can take advantage of. Parents may be able to avoid the kiddie tax by giving their child property instead of cash. Depending on the type of asset, there may be a deferred gain or a step up in basis to the child.
For example, if parents give their child appreciated stocks or bonds, the child will have a step up in basis when they receive the property. This gives the child the ability to later dispose of the appreciated assets without having to pay any capital gains tax themselves. Furthermore, parents can transfer real estate or business interests to their child, so long as all applicable state and federal laws are followed.
Another way parents can avoid the kiddie tax by setting up a 529 College Savings Plan. These plans are tax advantaged and provide tax savings on qualified education expenses. By contributing to a 529 College Savings Plan, parents can ensure that the funds are earmarked solely for their child’s education. Additionally, contributions to these accounts are tax deductible in some states.
Clearly, parents can help safeguard their children’s future when it comes to taxes by giving them property instead of cash. Not only can this help reduce their long-term tax bills, it can also help them save for their child’s future educational expenses. By being informed of the most effective strategies to reduce the kiddie tax, parents can pass on wealth to their children without sacrificing essential tax savings.
Strategies to Avoid the Kiddie Tax
The Kiddie Tax is designed to prevent wealthier taxpayers from taking advantage of lower tax rates on their children’s income. So, is there anything a parent can do to avoid the Kiddie Tax? The answer is yes. There are some strategies that parents can use to minimize or avoid the impact of the Kiddie Tax.
One strategy for avoiding the Kiddie Tax is to give your child property instead of cash. By doing this, you can take advantage of the lower tax rates on long-term capital gains. If your child is old enough, they may be able to benefit from the 0% tax rate on long-term capital gains. However, you must be careful when making this kind of gift. It’s important to understand the capital gains tax implications of giving property to a child, and you may want to seek the advice of a tax professional before making this kind of gift.
Another strategy for avoiding the Kiddie Tax is to make sure that your child has earned income from a job. The Kiddie Tax only applies to unearned income, so if your child has earned income from a job, they can pay taxes at their own marginal tax rate.
Finally, you may want to consider establishing a trust to hold the property you’re giving to your child. A trust can be used to shelter some or all of the child’s income from the Kiddie Tax.
When it comes to avoiding the Kiddie Tax, there are no easy answers. The best strategy will depend on your individual situation, and you may want to consider talking to a tax professional about your options.
Impact of the Tax Cuts and Jobs Act on Kiddie Tax
The 2017 Tax Cuts and Jobs Act (TCJA) made several changes to U.S. tax law, including limiting the amount of unearned income a child can have without incurring the kiddie tax. Since 2018, the kiddie tax is based on the tax-rates of trusts and estates, rather than the parent’s highest tax rate as it was before. Furthermore, the TCJA provides an increased standard deduction for trusts and estates, which can offset the effect of the higher tax rates.
The main purpose of the kiddie tax is to prevent higher-income parents from taking advantage of the lower tax rates for their children. With the new TCJA provisions, the kiddie tax can apply to relatively lower unearned income amounts than it had in the past. This means that more parents will need to be aware of the kiddie tax when it comes to giving property to children.
In many cases, however, it is still possible for parents to avoid the kiddie tax by giving their children property instead of cash. The key is to structure the transfer of property in such a way that the unearned income does not exceed the threshold established by the TCJA. For example, parents could structure the gift of a rental property in such a way that the bulk of the rental income goes to the child in the form of asset appreciation, rather than in the form of a rent payment.
Overall, the TCJA provides stronger incentives for parents to structure their gifts of property to their children in such a way that they can avoid the kiddie tax. By carefully planning their gift-giving strategy, parents can ensure that their children benefit from the lower tax rates and achieve the maximum amount of asset appreciation.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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