Congress Extends “Childhood” for Tax Purposes

The capital gains tax rate is scheduled to drop to zero percent in 2008, 2009 and 2010 for individuals in the 15% (or 10%) tax bracket. Some parents and grandparents have been considering making gifts of stock to low-bracket children so the kids could do some profit taking in 2008, free of capital gains taxes. But Congress has limited that strategy in the Small Business and Work Opportunity Act by extending the “kiddie tax” to children age 18 and below (formerly 17 or younger) and to full-time college students under age 24, effective in 2008, unless a student’s earned income exceeds half of his or her support. Currently the “kiddie tax” rules make children’s investment income over $1,700 taxable at the parents’ tax rates.

On the other hand, people who are sending checks to support low-bracket relatives might instead give them stock that could be sold tax free after 2007. The relative would carry over the donor’s basis and holding period. Philanthropic sons and daughters could fund two-life charitable remainder trusts with appreciated securities and direct that a parent or other family member receive lifetime income, with payments continuing for the surviving donor. Any capital gain income distributed to family members may be tax free in 2008-2010, depending on their tax brackets – and the donors receive income tax charitable deductions, plus capital gains tax avoidance when the trust is funded.


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