July 19, 2007

**Another Tax Increase on Teenagers:**

Where will we draw the line?

Dear Colleague:

**I urge you to join me in sponsoring legislation to repeal an unfair
tax increase on teenagers saving for college.**

Last year, the Tax Increase Prevention and Reconciliation Act of 2005
became law. While including many important tax cuts, [this bill also
included a tax **increase** on teenagers]{.underline}. [This tax was
increased even more this year]{.underline} in the U.S. Troop Readiness,
Veterans\' Care, Katrina Recovery, and Iraq Accountability
Appropriations Act, 2007, which became law on May 25, 2007.

Previous to this legislation, children under the age of 14, who could be
claimed as a dependent on their parents' tax return, were subject to a
tiered tax structure for their unearned income. This unearned income
could be interest earned on bank accounts or bonds in a Uniform Gift to
Minor Account, or dividends paid on stock. The first \$800 of income was
tax free, the second \$800 of income was subject to a lower child's tax
rate, and anything above \$1,600 was subject to the parents' tax rate.

The initial motivation for this structure was to discourage parents from
putting assets in their children's names to avoid higher tax rates.
However, once a child turned 14 all income was taxed according to the
child's tax bracket. Not so anymore!

Last year's legislation increased the age limit to 17, and this year's
legislation raises that age one more year to 18. So, the unearned income
of children aged 18 and younger will now be subject to their parents'
tax rate. This will affect families who have invested in savings
accounts for their children to use towards future college expenses.

Additional government spending does require more revenue, but given some
of the huge federal programs that waste money each year we should not be
raising taxes on our children, we should be cutting waste out of
existing government programs.

My bill will repeal the provisions included in the 2005 tax
reconciliation and 2007 supplemental appropriations bills. To become a
co-sponsor of this common sense legislation, or for more information,
please contact Kristen Glenn (5-4676), or
<kristen.glenn@mail.house.gov>.

> ![](media/image1.png){width="3.65625in" height="0.625in"}Sincerely,
>
> Congresswoman Marilyn Musgrave
>
> Colorado\'s Fourth Congressional District

![](media/image2.png){width="4.352777777777778in"
height="0.5819444444444445in"}

**June 16, 2007**

# Kiddie Tax Hits College Age

**Law That Shuts\
A Loophole Spurs\
Shift to \'529\' Plans**

**By ARDEN DALE\
*June 16, 2007; Page B2***

Eric Gregory recently switched to Plan B to finance his studies because
of changes in the kiddie tax. Eric isn\'t a kiddie, though: He is 21
years old.

\"We decided he should switch his savings into a \'529\' plan to fund
law school,\" said George Gregory, a tax attorney in Birmingham, Mich.,
and the father of Eric, a senior at Michigan State University in East
Lansing, Mich. \"That way, he can withdraw the money tax-free.\"

The kiddie tax looms large for a whole new group of people like Eric
because a law enacted last month will widen its reach, starting in 2008,
to include children up to their 19th birthday and dependent full-time
students to age 24. The tax is a set of rules that apply a parent\'s
federal rate to a child\'s investments. It was designed to keep wealthy
families from sheltering assets in a low tax bracket. For years, only
children under 14 were subject, but the ceiling went to 18 last year.
Congress took the changes even further this year.

College-savings strategies are getting a second look from some families
as a result. The new law boosts the appeal of so-called 529 plans but
makes other popular savings accounts less attractive.

For example, people with UTMAs or UGMAs \-- custodial accounts under the
Uniform Transfers to Minors Act and the Uniform Gifts to Minors Act that
allow an adult to save money on a minor\'s behalf \-- now face taxes as
high as 35% on withdrawals, rather than the 10% some paid while the
money was in the child\'s tax bracket. In contrast, the 529 plans are
completely tax-exempt: Money inside grows tax-free and owners pay no
taxes when they withdraw it.

The latest revisions to the kiddie tax represent \"the final nail in the
coffin for families trying to shift income from parents in a high tax
bracket to children in a lower one,\" says Dan Schrauth, a wealth
adviser in the San Francisco office of J.P. Morgan Private Bank.

For 2007, the kiddie tax applies only to investment income in a child\'s
name above an inflation-adjusted threshold of \$1,700. The standard
deduction allows the child to take the first \$850 tax-free. The second
\$850 is taken at the child\'s rate, which can be as low as 10% for
interest, dividends and short-term capital gains, and 5% for long-term
capital gains in some cases.

Income or gains beyond the \$1,700 are taxed at the parent\'s rate.
People between ages 18 and 23 are exempt from the kiddie tax if more
than half of their financial support comes from income they earn
themselves.

Among the potential victims of the revamped tax are UGMAs and UTMAs.
These accounts permit a parent to transfer property to a minor without
establishing a trust. When the child comes of age, usually 18 or 21,
depending on the state, the custodians may withdraw the money and the
child would pay tax at his or her rate. The child is free to take the
money and run. There is no obligation to use it for educational
purposes, as with a 529 plan.

Investments in the 529 plans, named for the section of the Internal
Revenue Service code under which they were created, can be withdrawn
free of federal taxes as long as the money is spent on higher education.

So what should families do with an UGMA or UTMA in light of the changes?
Mr. Schrauth and Vanguard Group\'s 529 chief John Haywood gave the same
advice. \"If you set one of these up 10 or 15 years ago for your child
who is over 18 but under 24, it might be prudent to take those capital
gains this year, while they\'re taxable at the child\'s rate,\" Mr.
Haywood said.

If a family is thinking about transferring assets to a child\'s account
to save for education, it \"might want to think about setting up a
529,\" said Mr. Schrauth.

Another strategy for families to consider is simple but effective,
according to Mr. Schrauth: Pay for a child\'s education directly. A
benefactor avoids the gift tax entirely by making tuition payments
directly to a qualifying educational institution.

Eric Gregory and his father decided to leave about half of the money
accumulated in a long-established UGMA right where it is and put the
other half into a new 529 plan. \"He may want to buy some things that
can\'t be bought from a 529,\" said George, who is also switching the
UGMA into Eric\'s name. \"He may decide he wants to buy a car.\"

Corrections & Amplifications:

In UGMA and UTMA accounts, the child pays taxes each year on investment
gains. Under the \"kiddie tax,\" some of this income may be taxed at the
parent\'s rate, and recent changes mean that more children will be
subject to the kiddie tax. Legal custodianship of an UGMA or UTMA
account terminates when the child comes of age, at which point the child
can either withdraw the money or maintain it in the account as direct
owner. This article incorrectly implies that these accounts aren\'t
taxed until money is withdrawn from the account.