Gifting assets to help pay for collegeSubmitted by Financial Planning Solutions, LLC on December 7th, 2017
Gifting appreciated assets (and the income generated from those assets) from parents, or grandparents, to children can be effective means of paying for college and minimizing taxes at the same time. In most cases, this particular strategy is used to maximize the funds available for a child’s college tuition because the income tax due is typically less when the income generated by those appreciated assets are taxed to the child rather than the parents.
However, when a child is under the age of 24, these strategies must be done correctly to avoid the "kiddie tax" rules. The Small Business and Work Opportunity Tax Act of 2007 (IRC Sec. 1(g)(2)(A)) changed the kiddie tax rules. Children are subject to the "kiddie tax" if:
- The child has not attained age 18 before the close of the tax year,
- The child is age 18 to 24 and a full-time student and the child's earned income for the tax year doesn't exceed one-half of his or her support;
- Either parent of the child is alive at the end of the tax year; and
- The child does not file a joint return for the tax year.
A child who is subject to the kiddie tax rule will pay taxes at his or her parents' highest marginal tax rate on the child's unearned income over $2,100 (for 2017) if that tax is higher than the tax the child would otherwise pay on it.
How to Qualify for the Gift of Appreciated Assets Strategy
If you can find ways to move income that would be taxable to you (at your higher tax bracket) to your children, the entire family will benefit. This technique also works if you have parents that you support in one way or another who are in a lower tax bracket than yours.
Benefit of the Gift of Appreciated Assets Strategy
By gifting those appreciated assets to a family member in a lower tax bracket, you are shifting the taxable appreciation of that asset from a higher bracket to a lower bracket in order to reduce taxes. Is it legal? Yes, it is, when done correctly. As long as you follow the IRS guidelines, shifting income is allowable.
Gifting appreciated assets to a child in a lower tax bracket is also a great way to fund a college savings account as long as those appreciated assets do not generate unearned income of more than $2,100 each year. If the child (beneficiary) is under age 24 and is a full-time student, then any unearned income of more than $2,100/year is subject to “Kiddie tax” and is taxed at the parents’ higher tax rate. Once a child reaches age 24 the kiddie tax rules do not apply, so the unearned income of more than $2,100 per year is taxed at the child's lower tax rates.
Looking for other year-end tax saving ideas, give us a call. We’re here to help.
Source: www.accfscom/blog posted 11/16/2017 by Ron Them.
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