Child AMT

[DaveinTexas]

Yet another thing I've never seen before.

A new client wants me to prepare his son's return who is under 10 years old. Over $30,000 in interest is reported to his son---the principal amount was given to his son from a lawsuit several years ago.

Well, I immediately thought that the child's income would be subject to the kiddie tax, but low and behold the child's parent's taxable income is $0 due to heavy losses from self employment---I didn't prepare their return.

Now since his son's income is not subject to the kiddie tax, the interest income is now subject to AMT. He doesn't qualify for the under 18 AMT exemption because he has no "earned income". What a mess. Now the child is paying 22% tax on this money.

I was trying to think of ways around this. If they setup a trust and transfer the money to the trust, any taxable income over $10,500 or so is taxed at 35%---yikes.

If the child's parents' taxable income puts them into the 25% bracket or higher in later years, the child's income will be taxed at that rate creating even more tax.

The money is supposedly locked away in a bank, so that if the parent needs access to it---say to pay taxes on the income, the parent must petition the court and hire a lawyer to do so. They said that no trust has been setup and no EIN was applied for.

What a mess. I suppose there is no way around it. I just don't see this too often---never in fact. Just wanted to share my weird story of the week.

[Deborah]

Same problem - found no solution

I have the same situation with a client who has a child receiving an annuity after the death of his mother. Child ended up paying AMT - I searched and fretted and looked everywhere - could find no way out. Very unfair.

[DaveO]

That situation stinks

I used to do returns for a weathly family that had transfered assets into the kids names. Used to have AMT on 3 or 4 kids every year. But they had the money so I never felt bad. The situations described here cry out for some change.

[Lion]

Interest

If the parents are in the 0% tax bracket, would it lower the tax overall for the family if the parents elect to report the child's interest and dividends on their own return? You'd have to run the numbers both ways. I haven't had one lately where the parents' rate was lower than the children's rates. (I had my own many years ago when my son's rate was the same as my own.)

[sea-tax]

Dave not sure if this is what you are talking about, but there are mutual funds out there that are amt free. Something with the way they invest the money either limits or negates the reporting of amt. Personally I have never looked at them or used them but only heard that they exist. Tell them to talk to a qualified investmetn advisor.

[DaveinTexas]

Can't do it

If the parents are in the 0% tax bracket, would it lower the tax overall for the family if the parents elect to report the child's interest and dividends on their own return? You'd have to run the numbers both ways. I haven't had one lately where the parents' rate was lower than the children's rates. (I had my own many years ago when my son's rate was the same as my own.)

One of the qualifications to do this is that the child's earned income cannot exceed $8,500. I thought about that one too.

I will do some research on the AMT free mutual funds.

Thanks.

[thomtax]

Earned Income

One of the qualifications to do this is that the child's earned income cannot exceed $8,500. I thought about that one too.

I will do some research on the AMT free mutual funds.

Thanks.

Dave,
Perhaps I did not read the original correctly, but I did not see anything about the child having earned income. So, dumb question, how does this $8,500 affect things?

LT

[DaveinTexas]

Oops!

I meant to say that the child's "unearned income" cannot exceed $8,500.

If anyone else is curious, From the 8814 instructions: Emphasis on the last part.

Use this form if you elect to report your
child’s income on your return. If you do,
your child will not have to file a return.
You can make this election if your child
meets all of the following conditions.
c There was no federal income tax
withheld from the child’s income.
c The child was under age 18 at the end
of 2006. (A child born on January 1,
1989, is considered to be age 18 at the
end of 2006. You cannot make this
election for such a child.)
You must also qualify. See Parents who
qualify to make the election below.
c The child’s only income was from
interest and dividends, including capital
gain distributions and Alaska Permanent
Fund dividends.
c The child’s gross income for 2006 was
less than $8,500.