Tax breaks on dividends and capital gains for college-age dependents will end on January 1. In the meantime, families can still take maximum advantage of the current law.
A significant source of tax savings for American families will disappear on January 1, 2008. That’s when changes Congress made to the tax code in 2007 go into effect, increasing the tax rate on unearned income college-age taxpayers receive from their parents. Simply put, Congress is cracking down on parents who transfer such assets as stocks, bonds and mutual funds to children to take advantage of lower income tax rates.
As a result, the Small Business and Work Opportunities Act of 2007 extends the higher tax rate to children 18 years old and to full-time students ages 19 to 23. For 2008, the unearned income of children that exceeds $1,800 will be taxed at their parents’ usually higher marginal income tax rate—making it more difficult to shift assets to children to, say, meet college costs. (The $1,800 limit adjusts annually for inflation. The limit is $1,700 for 2007.)
Time to act
Families affected by the changes may want to take advantage of the time remaining in 2007 before these new rules go into effect. Your Financial Advisor or Jacksonville Estate Planning Lawyer can help you develop a strategy to transfer appreciated assets to your children ages 18 to 23 and sell that property in 2007 at lower capital gains rates.
For now, you can give your child up to $24,000 ($12,000 per parent) in appreciated property without triggering a gift tax. For example, a couple could make their 19-year-old daughter a gift of stock valued at $24,000. Assuming a $4,000 cost basis and the daughter’s sale of the shares by December 31, 2007, the $20,000 gain would be taxed at her 5% tax rate, resulting in a $1,000 tax. However, if the family waits until 2008 to sell the stock, the tax liability could reach $2,800.
If this same family made transfers in previous years in expectation of selling the assets in 2008 or beyond to pay for their daughter’s college education, 2007 would be a good time to consider selling.
Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your adviser or Jacksonville Estate Planning Lawyer as to any tax, accounting or legal statements made herein.