Jewish World Review
http://www.jewishworldreview.com | (KRT) Holiday giving is tough enough, even if you're looking for more or less ordinary presents.
But what if you have something big in mind, such as contributing to a child's college education fund?
In that case, you need to consider tax issues, and tax rules are always changing.
Fortunately, they got better this year since rates were cut on income, dividends and capital gains. Lots of money can be saved, for example, by moving profitable investments from an adult's account to a child's.
So here's a quick rundown on the key things to keep in mind.
The Bush tax cuts adopted in 2001 seemed to make this less of a concern. The estate tax used to apply to all assets over $600,000. That means no tax is due on estate assets below that level.
The exclusion will be $1.5 million in 2004, and it will rise to $3.5 million in 2009. The estate tax will disappear in 2010.
But unless Washington extends the cuts, the exclusion will return to the 2003 level of $1 million in 2011, with a top tax rate of 55 percent on money over that amount.
Given the growing federal budget deficit, Congress could simply let the 2001 cuts expire. And, of course, Democrats could be in power in 2010, and many of them don't like the estate-tax cut.
Hence, people likely to leave estates larger than $1 million should consider estate-tax-reducing maneuvers such as making gifts.
That's because these children are taxed at their own brackets, which are usually a lot lower than the parents' rates that generally apply to younger kids.
While the parents may be in the maximum 35 percent income tax bracket, their children may be in the 10 percent bracket. Similarly, the parents are likely to pay 15 percent on capital gains and dividends, but a child may pay only 5 percent.
Capital gains tax is on the difference between the sales price and the purchase price. When the child sells an investment received as a gift, the giver's original purchase price is used to figure the tax bill.
Thus, it can really pay to shift stocks, bonds or funds that have grown in value to custodial accounts opened for the children. With these, there's no restriction on when the money can be withdrawn or how it can be used, as there is with the Coverdell and 529 plans.
Keep in mind, though, that these gifts cannot be taken back. The child will have complete access upon turning 18 or 21, depending on the state.
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