Simply Junior

The term kiddie tax identifies the age in which kids become an individual tax entity separate from their parents for the purposes of calculation of taxes on investment income. Right from birth to the age of fourteen, children might earn investment income of up to double the standard dependent deduction. They are supposed to be taxed on the basis of their tax rate, usually around ten percent. Any sort of investment income above that threshold, would be taxed at the presumably higher tax rate of the parents.

After the age of fourteen, all the investment income has been taxed at the lower rate of the child. The Congress has officially extended the childhood age to 18, for the purpose of calculation of tax on the investment income. As per the Tax Increase Prevention and Reconciliation Act of 2005, passed in May 2006, the age was extended to eighteen. A child is said to be eighteen for the total tax year in which the child turns eighteen. For the year 2006, the threshold in terms of investment income has been fixed at $1,700. The amount is taxed at child’s rate. Anything, which is in excess of this amount, is taxed up at the rate of the parents.

Kiddie tax applies only in case of investment income and not earned income, therefore, teens with jobs would pay income tax as according to their rate and not their parents’. Also, individuals who get married before the age of eighteen are presumed to be adult as they are not children anymore, and in case if filing jointly, they file according to their own rate.

As it is, the change tends to put the future of the accounts set up under the Uniform Gifts to Minors Act, or the Uniform Transfers to Minors Act. As per these acts, the individuals might place the assets in the accounts for benefit of a child, yet retain control over the assets as trustee as long as the child doe not reach the age of majority, generally eighteen. The tax advantage of moving assets to the name of a child might now be deducted as income invested in such accounts over $1,700 would be taxed at the rate of the parent.

With the capital gain rate of five percent, in the ten percent or fifteen percent tax bracket, the parents falling in the higher brackets might still wish to consider the transferring of appreciating assets. However, parents who feel they had the years in between fourteen and eighteen to sell the assets in the portfolio of the child and potentially pay up no capital gain tax have lost the option.

After you leave a job, there is a big tax question you will have to deal with and that is what should you do with any money you have in a qualified retirement plan with that former employer. This included the 401(k), stock bonus, profit-sharing and any other qualifying plan. Generally you would be advised to roll it all into an IRA.

While this usually makes a lot of sense, it allows you to take management of your funds for retirement and continue deferring taxes on income the funds generate. Be aware though, if this process is not handled correctly the rollover can end up being very costly. Let us take a look at the property way your should arrange your rollover tax-free.

Roll over directly (trustee to trustee)

If the decision to rollover is what you made, make sure you plan for a trustee-to-trustee or direct rollover from your retirement account into a rollover IRA. Don’t have the check written to you personally, make the check you receive from your company’s plan out to the trustee or the custodian of your new rollover IRA. You can even have a wire transfer made into your new IRA rollover account.) Since the new IRA has to be set up before you receive the rollover, your IRA account can remain empty until the rollover transaction is made.

The direct rollover is essentially important because if you get the check made payable to yourself there is a 20% taxable amount withheld for the federal income tax. Leaving you with sixty days to get the “missing” 20 percent and put it in the rollover IRA. And you will end up owing taxes on that 20%. And you will end up paying the dreaded ten percent early withdrawal tax as well if you are under 55.

If you are Over 55 you Should not Rollover Any of the Money You Need

Generally rollovers are good because they defer the taxes, but think about it this way… you are over 55 and you get a payout from the former employer’s retirement plan, you will not have to pay the premature 10% withdrawal tax if you keep the money (but you will still owe the income taxes). But if you roll that money into the IRA and then you need to take some out later, before the age of 59.5, you will have to pay a ten percent penalty tax on it.

Obeying the 60-Day Rule

This is another pitfall in the rollover, failure to meet their 60-day ruling. You will have to deposit the distribution into the new rollover IRA within the 60 day period in order to get the tax-free rollover. This 60-days will start the day after the funds are received from the company’s retirement account. And if the 60-day period ends on a holiday or weekend, you will not get any slack.

The Bottom Line Is

It might seem like a simple task, however arranging your tax-free rollover of your retirement account is not so simple. I have seen failed rollover attempts from people many years now and there is no end in sight. Ask the advice of a tax pro to clarify anything you don’t understand that we went over in this article.