New Alternative Available in Handling ‘Kiddie Tax’

Many parents who must reckon with the so-called kiddie tax have a new choice in how they handle it when they file their returns for 1989.

They can, as before, complete separate federal income tax returns for each of their offspring who must file. Or in some cases, they may be allowed for the first time to incorporate the childrens’ income on their own tax returns.

The difference may sound like no big deal. The main intent of the change was to make filing a little easier by eliminating the need for separate returns from children in relatively simple circumstances.

But experts on the subject say a decision for either option should be made with care, since it could affect a family’s overall tax bill.

The “kiddie tax” was born with the 1986 tax reform law, which sought to curtail the popular practice of reducing taxes by shifting income to children and other dependents.

Henceforth, the law decreed, investment income received by youngsters under age 14 would be taxed at their parents’ tax rate once it exceeded specified limits.

This immediately transformed a good many children into full-blown Social Security-card-carrying taxpayers. It turned out, however, that hardly anybody--not even the Internal Revenue Service--was entirely happy about all the extra paper work engendered by the change.

So was born the option for parents of a child under 14 who has income of between $500 and $5,000 derived entirely from interest and dividends, on which no estimated tax or withholding has been paid.

Whichever filing method a parent chooses, a child in this situation owes no tax on the first $500 of earnings. The next $500 is taxed at a 15% rate.

Past $1,000, the money is taxed at the parent’s top rate, which in many cases is 28%.