MAKING APRIL 15TH YOUR FAVORITE DAY
in income that they don’t even have to pay taxes. Either way, the income will flow away from you and your higher tax rate to them.
There are other ways to shift income from you to family mem- bers either by creating trusts or custodial accounts, or by making outright gifts to relatives. Let’s consider that you are married and have a combined income of $125,000, putting you in the 30-per- cent marginal tax bracket. In addition to your income, you have $25,000 worth of corporate bonds that pay interest of $3,500 annually. That interest amount is fully taxable to you and your spouse. But why should you pay taxes on it? Why not give those bonds to your 16-year-old child who currently doesn’t make enough income even to pay taxes? You could agree that the inter- est generated by the bonds, as well as the principal (if they are due to mature soon) will help pay for your child’s college. Assuming your child will then have to pay taxes, his or her tax liability caused by the interest will be $275.
Interest Child’s tax rate
= $3500 = 10%
Minimum standard deduction = $750*
= 10% ($3500 $750) = $275.00
*Assume the child has no earned income. Standard deduction amount based on 2002 tax figures.
By passing the income to your child, you not only reduce your income by the $3500 that you receive in interest annually, but you reduce your tax liability by $1050. However, this strategy is not as easy as it seems. If your child is younger than 14 years old, the investment income is taxed at the same rate as the parent’s income, to the extent that the investment income exceeds $1400. This means that if you were to give your corporate bonds and their applicable $3500 annual interest to your 8-year-old daugh- ter, she would be taxed as follows: the first $1400 (minus the $750 deduction) would be taxed at her rate (10 percent); the remaining $2100 would be taxed at your higher tax rate, in this case 30 percent.