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Kiddie tax changes result in financial aid traps: new law affects planning strategies.(from The Tax Adviser)
In the past, wealthy parents could significantly lower the family tax bill by transferring investment assets to minor children, resulting in investment income taxed at the kids' (presumably lower) rates. To curtail this, Congress enacted the "kiddie tax," under which children under age 14 who have more than a specified amount of unearned income are taxed at their parents' rate. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) raised the age limit to 18. This change has reduced the income tax benefits of shifting assets from parents to children--and also negates the efficacy of some traditional financial aid planning strategies.
TAX STRATEGIES
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