Tax Increase Prevention and Reconciliation Act (TIPRA), for tax years beginning after 2005, a child is subject to the kiddie tax if he has not attained age 18 before the close of the tax year. Before the change in the law, it applied if the child had not attained age 14 before the close of the tax year.

As such, UTMA and UGMA accounts, gifting assets to children, might not provide any tax advantage. Beginning in 2006, the kiddie tax makes the child pay tax at his or her parents' highest marginal rate on the child's unearned income over $1,700. (This figure will be adjusted annually for inflation.) If the parent is in a higher tax bracket than the child (most likely the case), it increases the tax on the child's income. In other words, income shifting provides no benefit, and gifting typically brings about income shifting.

Not all is lost.

You can still gift assets to your child. The kiddie tax does not kick in until there is unearned income over $1,700. If your child is in a lower tax bracket than you are (and, if not, maybe your kid should be gifting to YOU), then it does make sense to shift assets which produce unearned income of $1,700. How much can you shift via gifting?

The response is: what rate of return are you producing on that which you shifted? You should gift assets that produce unearned income of no more than $1,700 for 2006. As such, UGMA and UTMA can make sense.

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