kiddie tax question
I know the limit is now 18 (or age 24 if a student receiving >50% assistance from parent).
Assuming a 20yr old college student with no other income. The question is – if the UGMA funds are in a variable annuity will the distributions be taxed at the childs rates or the parents?
ie the distribution will be on a 1099R as income vs. a 1099 showing investment earnings (1099B, 1099INT, or 1099DIV)?
Obviously there will be penatly tax in this situation, but the childs rate w/ penalty tax is still far below the parents rate.
Permalink Submitted by Alan Spross on Tue, 2007-11-06 19:45
The kiddie tax does not affect a dependent over age 17 until Jan, 2008. Therefore, if this case there is still time to have the distribution taxed at the student’s rate if the distribution is done prior to year end.
After 2007, the kiddie tax would apply and the ordinary income rate of the parents would also apply since the 1099R taxable amount would be subject to kiddie tax rules for the amount of income over the threshold of approximately $1,800. Early withdrawal also applies.
Having a VA in an UTMA account that the child can unconditionally claim at majority does not appear to be a good plan, but there will be some savings if the distribution is done prior to year end so at least the kiddie tax portion of the tax hit is avoided.