Children are generally taxed at a much lower rate than their parents. For this reason, many parents may be surprised to learn about the so-called “Kiddie Tax” that may apply to certain unearned income in their child’s name. This increased tax rate applies to children younger than 19 and to young adults ages 19 to 23 who are still full-time college students. If parents have set up investments for their child and the child earns any dividends, capital gains, interest, or other unearned income, any amount over $2,100 will be taxed at the rate of the parents—not the child.
The IRS first adopted the Kiddie Tax Rule in the 1980’s intending to prevent parents from evading investment taxes. Over the years, the rule has become stricter with the age limits steadily raised. There are some exceptions to the Kiddie Tax Rule, but not many:
- The child is married and files a joint tax return with their spouse
- The child’s earned income makes up over 50% of their support
If an exception does not apply to your situation, you could find your child’s unearned income being taxed at a rate as high as 35% instead of the general 10% rate that would apply to most children.
Can Life Insurance be a Solution?
Many people think of life insurance as simply a way to protect their dependents in the event of their death. However, permanent life insurance policies are also a great investment and savings opportunity for individuals of any age. In addition, any accumulations of the cash-value of your insurance policy will not be taxed at all until a policyholder borrows or withdraws funds from the policy. This means that you can still invest money for your children and ensure they will not have to pay the Kiddie Tax so long as they do not touch the funds. Furthermore, the return rates for permanent life insurance over a number of years is often greater than other tax-free investment choices.
Call Today for a Quote!
Whether you are interested in saving on taxes, saving for your children, or simply protecting the financial well-being of your dependents, life insurance policies can have many benefits. There are many forms of life insurance and our highly experienced agents can help you choose the policies that are most beneficial for your goals. Please contact the Connecticut office of Berliner-Gelfand & Co, Inc. today for a quote and to discuss your options.