Do you approve that Congress extended the "kiddie tax" to full-time students up to age 23?

Question

I just learned that beginning in 2008, full-time students up to age 24 likely will have to pay income taxes on unearned income, such as interest, at their parents' top income tax rate.

http://www.hansonbridgett.com/newsletters/EstatePlanning/EstatePlanJuly07.html

This law seems unfair to me and unworkable in many cases.

The existing "kiddie tax" applies to all taxpayers up to a given age.

Why, for Pete's sake, is Congress applying higher tax rates only to full-time students? Why not part-time students or ski bums?

What if a kid is on his own, alienated from one or more parents, living off his savings, loans, grants, gifts from grandparents (or even others), trying to get an education, and can't meet the earned income test in this new law (can anybody paying room, board, tuition, etc. of over $20,000/year), how does he get access to his parents' tax returns, especially if the parents are divorced?

Age 18 is adulthood. It's not age five.

Is Congress nuts?

From what I've read this extended kiddie tax will apply to almost all full-time students because of its earned income test.

For a full-time student to be exempt from the tax, the student will have to EARN over 50 percent of the student's support, which includes tuition, room and board.

Even if a full-time student is an emancipated adult, receives no support payments from anybody, and consequently is nobody's dependent, the student likely will be subject to this kiddie tax (unless the student's earned income is over 50 percent of tuition, room & board, entertainment and other support expenses, very unlikely in most cases).

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http://www.forbes.com/opinions/2007/05/29/kiddie-tax-congress-oped-cx_to_0530onink.html

Better to be a ski bum than a full-time student.

Answer 1

I agree with you that this has to be one of the most difficult to implement taxes.

You are correct that this tax is imposed even if the adult child who is a full-time student under 24 is not a dependent of either parent.

Full-time college students with substantial investments and parents in high tax brackets may end up paying more tax. Such students will shift their investments to those which are tax-deferred until they reach age 24, or to those that produce tax-favored income such as long-term gain or qualified dividends.

A college student who has purchased a rental property to provide income while in school may want to re-think his strategy.

A full-time student who has a large interest-bearing investment which is used for his education expenses could shift that money into a 529 plan and spend it on his education, avoiding the kiddie tax.

Starting in 2008, a student can escape this tax by getting married before the end of the year. If the student was getting married anyway, and was going to get hit with the kiddie tax, they may want to marry before the year was up.

Answer 2

The reason for this is that some wealthy families would transfer ownership of securities and bank accounts to their children to avoid paying taxes or to benefit from the much lower tax rates on the lower income of the child.

Very few children -- even 18 to 23 year olds -- have over $1,700 in UNEARNED income and the few who do are usually part of an upper middle class or wealthy family. Keep in mind that at savings account rates today that works out to a balance of between $50,000 and $70,000 -- not exactly the territory of the average baby sitter or snow shoveller.

The "kiddie tax" only applies if the child is claimed as a dependent by their parents, as would generally be the case of a full-time college student up through age 23. If the child is independent at that age and is self supporting the "kiddie tax" will not apply to them. If the kid is a part-time student or ski bum as you put it, they are no longer dependents as far as the tax code is concerned so this would not apply to them.