Last year, Congress broadened the kiddie tax to apply to children under age 18, up from 14.
The kiddie tax doesn't just tax rich kids--it taxes all kids who save and invest their money.
He can get out of the kiddie tax and claim an exemption and standard deduction for himself.
This year, Congress extended the "kiddie tax" to apply to children through age 17, up from 13.
But under the proposed provision, a child would have to meet a separate "earned" income test to escape the kiddie tax.
One reason is the kiddie tax, which limits the tax benefit from parking investment assets in the name of a low-bracket minor.
Moreover, the provision in the war funding bill would create a tougher test for families to get out of paying the kiddie tax.
The kiddie tax expansion "is going to be in a tax bill this year, " says Todd Steinberg, a tax lawyer in McLean, Va.
New "kiddie tax" rules provide that children are taxed at their parents' higher tax rate through age 18 or age 23, if they're full-time students.
In the legislation, the kiddie tax is considered to be an offset provision for tax breaks given to small businesses, but there is more to the story.
So they passed the new kiddie tax and turned all of our American "kiddies" into little Dutch boys to plug the hole in their legislative dike and give small businesses a break.
The kiddie tax law was originally established to prevent well-off families from abusing the strategy of shifting unearned income to their children, where it would be taxed at a lower tax rate than their own.
Starting in 2008, the only way that college students under age 24 will be able to avoid the kiddie tax is if they provide over half of their own support from their earned income (wages and salaries).
At the end of the day, the kiddie tax leads to a higher tax bill, and families will ultimately move to one side of the investment fence or the other--529 college savings plans or alternative types of accounts and investments used in combination with the education tax credits.
Until recently, the kiddie tax only applied to children under the age of 14, but in 2005, the Tax Increase Protection and Reconciliation Act moved the age to 18, and the new legislation that was passed on Friday expanded it further: Effective Jan. 1, 2008, the kiddie tax will apply to children age 18 and younger as well as college students under the age of 24.
Troy Onink, a contributor to Forbes and an expert on the intersection of tax planning and college aid planning, looks at the kiddie employment angle here.
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