Kiddie Tax - YouTube

Hi. Lee Phillips here I want to talk to you for two seconds about something called

the kiddie tax.

Now, now most people don't worry about the kiddie tax,

but it's kind of a hideous tax on children

and it's intended to get the rich. The rich need to pay their fair share.

You know how that one is.

Well, what happens is, one of the three tax techniques is shifting income.

The other two are postponing income or changing the nature of the income.

Basically all of tax planning

is based on one of those three concepts.

Shifting income is where a person earns the income

and then somebody else pays the tax on it.

The way shifting income works

is daddy the doctor sets up a company

puts all their equipment into the company

or the backhoe owner of the little business puts his backhoe into the company

and then the children own the company.

The operating company then rents the backhoe, rents the medical equipment

and then they pay rent.

Well, who gets the rent?

the owners of the company who own the back hoe or who own the medical equipment.

The kids.

They get the money. It's not earned income, it's passive income.

And that's a very important concept.

So passive income goes down to the children.

We've now taken money from daddy, he earned it,

transferred it to rent, moved it to the children.

We've "shifted" it to the kids.

And the kid pays tax on it.

Or, daddy just gave the kid a million dollars in IBM stock

and the kid gets a big dividend every year

I don't know if IBM pays dividends or not

but the kid gets a big dividend every year

and makes money.

that would have been money that if dad had kept the IBM stock,

dad would have had to have recognized in his income.

So a number of years ago, a lot of years ago,

they said nah, this is too good. This shifting income stuff.

So they said, ok. What we're going to do

is we're going to make it so if the kid earns unearned income

now that's not income that he gets from working at McDonald's for four bucks an hour

oh no, we have minimum wage now, I remember now.

but he earns his money at McDonald's-- that's earned income.

He earns his money through dad's IBM stock or the rent stuff where he gets passive income

then we're going to say okay

the kid didn't earn that income.

Dad actually earned that income.

And we actually take that income and put it on top of dads normal income.

So it actually could increase his

adjusted gross income

it does everything and guess what?

The kid gets to take that money,

put it on top of dad's actual income

that raises dad's income tax rate, even possibly

and then we calculate the tax

and the kid pays the income tax on this passive income at daddy's then calculated tax rate.

Oh, isn't that cute?

And just to make sure we do it right,

even if the kid worked at McDonald's for a million years

and a million dollars and invested in IBM stock--

--dad had nothing to do with it--

that's still unearned income to the kid

and he still has to pay the kiddie tax

or the tax at daddy's rate

on this unearned income.

What's a kid?

Well, there are a lot of different versions but basically anything under 18 is a kid.

19 if you're supporting him

or her obviously

if the kid is 24--anywhere between 18 and 24 and they're going to college

and you're taking them as a deduction

then they are a "kiddie" for the kiddie tax purposes.

So it's kind of a hideous tax in a number of ways

but it's the way that the rich pay their fair share.

We've talked about the shifting income concepts in other YouTube videos.

So you can check on that.

And if you've got kids, then it's it's okay. Shift a little income down to them.

How much?

Well the law says that the kid's going to have to

have to file his own tax return if he earns a little over $6000

right now, that changes all the time look it up

or if he has passive income a little over $1000

$1050 actually right now, that changes too

So if the kid makes a thousand bucks in unearned income

or passive income

Then he's gotta file a tax return, pay the kiddie tax.

If he actually earned $6000 then he has to file.

So the kid has to file if he has unearned income.

But you can pass a thousand bucks down to the kid with no problem with the shifting concept.

That's $1000 you didn't have to pay tax on.

And the kid uses the thousand dollars to pay his own camp fees

to pay his own Disneyland tickets

anything which is not your legal support obligation

-- food, shelter, clothing, education, basically.

The kid pays his own.

Great way to save a little bit on taxes

They keep clipping it back, making it harder.

That's what they always do.

This is Lee Phillips

I'm talking on the kiddie tax.