In 2008 the new law raised the age to under-19 (under-24 if a student) at which a child's unearned income in excess of $1700 ($1900 in 2009) is taxed at the parent's rate.

Kiddie tax is the name for the way of determining the tax a child will pay when the dependent has unearned income (interest, dividends, capital gains, royalties, etc.) of over a set amount and is under the age of nineteen. Previously, Kiddie tax applied to children under the age of fourteen. In 2008, the age rose to match the age of dependency. It applies to children under the age of nineteen or full-time students under the age of twenty-four.

Kiddie tax rules apply the parents’ tax rate to the excess unearned income of the child once it tops the set amount (i.e., $1,900 in 2009). The income below that amount is normally subject to a standard deduction and generally a ten percent tax rate. However special rates apply for 2008-2010; the tax rate will be zero for those who have parents in the 10-to-15-percent income tax bracket.

How do the new rules change the savings strategy?

The new kiddie tax rules also change how you can help your children, and grandchildren, save for their future. When it comes to children’s savings and college, the advantage of having children save in their own accounts or custodial accounts have become less appealing. Using traditional investments for children’s savings are less desirable because investments bear interest and are thus subject to taxation.

The importance of this change is that the child who has savings, especially through trust funds or other means, probably will be paying a larger tax than he or she would otherwise be accustomed to. In addition, parents who want to shift income to the child through gifts of stock or other investments may need to seek advice before making the transfer. Tax-efficient saving will require a little more strategizing, but can be done.