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Teen Tax Alert

Changes in tax law could affect how much your kids are taxed.

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This story appears in the January 2007 issue of Entrepreneur. Subscribe »

Until recently, tax law subjected young children to the same tax rates as parents in an effort to steer parents away from avoiding taxes by stashing income-producing assets in their children's names. Known as the "Kiddie Tax," this provision applied to children from birth to age 14. From 14 on, however, teens' assets were taxed at their own rate--which was typically significantly lower than that of their higher-earning parents.

But now that the recently passed Tax Increase Prevention and Reconciliation Act has boosted the Kiddie Tax age limit to 18, older children face higher tax rates on income from interest, dividends and capital gains. "This will have some teenagers gagging on a silver spoon," says Bob D. Scharin, RIA senior tax analyst at New York City-based Thomson Tax & Accounting, a provider of tax information and software. "In many cases, parents and grandparents provide gifts of up to $12,000 to children each year as a way of shifting income and lowering their tax bite. Now, shifting income only works if the child is over 17."

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