Whether your loved one is just beginning his or her educational journey or they are planning to enroll in college in the next year or two, it’s never too early to begin the planning process to fund those future college costs – or to pay for those current or imminent college bills. We have outlined several approaches that seek to take maximum advantage of tax benefits to minimize those expenses. Please note that these suggestions are strictly related to tax benefits. You may have non-tax-related concerns that make these suggestions irrelevant. Please do not hesitate to contact your tax advisor to learn more.
In some cases, transferring ownership of assets to children can save taxes. You and your spouse can transfer up to $32,000 in 2022 in cash or assets to each child with no gift tax consequences. And if your child isn’t subject to the “kiddie tax,” he or she is taxed on income from assets entirely at his or her lower tax rates—as low as 10% (or 0% for long-term capital gain).
The kiddie tax applies if: (1) the child hasn’t reached age 18 before the close of the tax year or (2) the child’s earned income doesn’t exceed one-half of his or her support and the child is age 18 or is a full-time student age 19 to 23.
The kiddie tax rules apply to your children who are under the above-described cutoff age, and who have unearned (investment) income for the tax year of more than $2,300 for 2022 ($2,200 for 2021). While some tax savings on up to $2,300 of income for 2022 can still be realized by shifting income to children under the cutoff age, the savings aren’t substantial.
After 2020, children to whom the kiddie tax rules apply, are taxed on that excess amount at their parents’ tax rates, if the parents’ tax rates are higher than the child’s tax rates. For example, for 2022, the first $1,150 of a child’s unearned income qualifies for the standard deduction, the next $1,150 is taxed at the child’s income tax rate, and unearned income above $2,300 is taxed at the parent’s marginal income tax rate.
A variety of trusts or custodial arrangements can be used to place assets in your children’s names. Note, it’s not enough just to transfer the income, e.g., dividend checks, to your children. The income would still be taxed to you. You must transfer the asset that generates the income to the children’s names.
Please contact us to learn more.