BERLIN – A significant source of tax savings for American families will disappear on Jan. 1, 2008. That’s when changes Congress made to the tax code in 2007 go into effect, increasing the tax rate on unearned income college-age taxpayers receive from their parents. Simply put, Congress is cracking down on parents who transfer such assets as stocks, bonds and mutual funds to children to take advantage of lower income tax rates.
As a result, the Small Business and Work Opportunities Act of 2007 extends the higher tax rate to children 18 years old or younger and to full-time students ages 19 to 23. For 2008, the unearned income of children that exceeds $1,800 will be taxed at their parents’ usually higher marginal income tax rate — making it more difficult to shift assets to children to, say, meet college costs.
Families affected by the changes may want to take advantage of the time remaining in 2007 before these new rules go into effect. Your financial advisor can help you develop a strategy to transfer appreciated assets to your children ages 18 to 23 and sell that property in 2007 at lower capital gains rates.
For now, you can give your child up to $24,000 ($12,000 per parent) in appreciated property without triggering a gift tax. For example, a couple could make their 19-year-old daughter a gift of stock valued at $24,000. Assuming a $4,000 cost basis and the daughter’s sale of the shares by Dec. 31, 2007, the $20,000 gain would be taxed at her 5-percent tax rate, resulting in a $1,000 tax. However, if the family waits until 2008 to sell the stock, the tax liability could reach $2,800.
A transfer like the one described here can spark an ongoing discussion about family assets.
“The sooner the dialogue begins, the better,” said Scott J. Cooper, a Managing Director in the Private Banking and Investment Group at Merrill Lynch.
And talking about money with your children need not be difficult, says Kevin L. Hindman, Western Region Manager for Merrill Lynch Trust Company. “Transferring wealth early on can free families from dealing with inheritance tax issues and allow them to focus on teaching children about assuming responsibility for the family’s assets,” he said.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)