FOR IMMEDIATE RELEASE

Parents Beware:  Kiddie-Tax Laws Might Get You

Lohman Company Explains Some Freightening Realities & How to Work Around Them

December 20, 2007 -- Ever changing kiddie-tax laws continue to discourage parents from transferring assets to their kids in order to save on taxes and have many parents panicking.  However, if you have kids who are 18 to 23 years old by the end of the year, you still have time to act before the latest change takes affect on January 1, 2008.  However, understanding how the laws work and trying to simplify their application can help, according to Mary Foretich, tax manager for Lohman Company, PLLC.

“The window has become very specific and if a child can sell assets by year end, they may be able to take advantage of the tax savings,” she said.  “Parents with children who will be age 18 by December 31, 2007 have a limited opportunity to do planning.  Starting in 2008, 18 year olds and dependent students ages 19-23 will be subject to kiddie-tax rules and will have to pay tax on unearned investment income at their parent’s rate.”

What does that mean for you? If your children are age 18 through 23 by the end of the year, they can still take advantage of paying capital gains tax in their lower brackets.  For example, if a child has an investment portfolio and is 18, Foretich says that parents may want to look at their child’s portfolio and determine if selling assets with significant capital gains would be a good move.  If such assets are sold before year end, taxes would be calculated based on the child’s 2007 tax rate.  The benefit is that some or all of the capital gains tax could be paid at a 5% rate (rather than 15%) and then the parents could reinvest into other types of assets.  However, the newest expansion to kiddie-tax laws has a new twist.

Starting in 2008, the kiddie-tax will be expanded to include dependents under 19 and dependent full-time students under 24.  Furthermore, for those children who are 18 or full-time students age 19-23, the only way to benefit is if that child has earned income of more than one-half of their support.  For example, let’s say a child is attending a private college that costs $40,000 a year, and the child is getting distributions from a trust, but all of the income is unearned interest and dividends.  In order for the child to pay taxes at his or her rate, he or she would need to have earned income (i.e. wages) of at least one-half of their support cost, or $20,000. 

“To best take advantage of lower tax rates before year end, you might consider giving appreciated assets to children who are between the ages of 18-23.  If the child then sells that asset before year end, the gain will be taxed at the child's lower rate and the funds can go towards college tuition,” said Foretich.  “A parent can give each child up to $12,000 this year without triggering the gift tax.  Married couples can jointly give up to $24,000 per child.”

Foretich recommends talking with your tax advisor about the tax advantages of kiddie-tax laws.  She provides the following tips:

• Look at entire family unit - Don’t let the tax decisions be the leading factor when looking at your family portfolio.  Economic decisions should take precedence.  If it doesn’t make sense for your family or economic situation, the tax issues aren’t going to change that.
   
• Get organized – It is important that you keep track of your investments and review them at least annually with your investment advisor to be sure they are still right for your needs.  Also, if you do have assets in the name of a child who is a dependent, be sure to complete and file your return timely because that child can’t file his or her taxes until mom and dad have filed their return.
   
• Diversify your portfolio - Your portfolio should match your family dynamics and should change as your family changes.  For parents with younger children, tax-deferred investments or zero coupon bonds are great investments according to Foretich because the earnings are not eaten up by taxes every year.  Also, growth type stocks that are not dividend paying will not be taxed until sold.
   
• Have a back-up plan - Sometimes the best plans go wrong and you want to have a fall-back when they do.  If part of your tax planning depended on gifting appreciated assets to your teen or college student so he or she could sell them tax-free in 2008, when the capital gains tax was supposed to be zero for people in the lowest tax brackets, it's time for plan B. 
   

About Lohman Company, PLLC

Founded in 2000, Lohman Company, PLLC is a certified public accounting and business consulting firm offering professional tax, audit, accounting and consulting services to privately-owned companies in Arizona with revenues up to $200 million.  Lohman Company, PLLC specializes in serving clients in a wide range of industries including technology, manufacturing, wholesale distribution, construction, real estate and services.  Lohman Company, PLLC is committed to providing the highest level of proactive services to its clients within an atmosphere that encourages camaraderie, intellectual challenge and work-life balance for all employees. 

For More Information Contact:

Lohman Company, PLLC
Stapley Center
1630 South Stapley Drive, Suite 108
Mesa, AZ  85204

Phone:   (480) 355-1100
Fax:       (480) 355-1130
Internet: info@lohmancompany.com