"Kiddie tax" provision taxpayer-unfriendly

More children will be trapped by the dreaded "kiddie tax" this year. "This year Congress has made income-shifting a dream of the past," wrote David Marotta and Beth Nedelisky of Marotta Asset Management Inc. of Charlottesville, Va., in a recent edition of their newsletter "Money Advice Through The Year." Mr. Marotta is president and chief compliance officer of the firm, and Ms. Nedelisky is an investment adviser. The "kiddie tax" is a tax on children's unearned investment income or capital gains. To prevent parents from transferring highly appreciated investments to their children who are in lower tax brackets, children under 19 or full-time students under 24 will owe taxes on unearned income at their parents' higher tax rates as of 2008 under the Small Business and Work Opportunity Act of 2007. The expanded kiddie tax now makes uniform gifts to minors' accounts and uniform transfers to minors' accounts a poor choice for college savings, according to Mr. Marotta and Ms. Nedelisky. "Instead, 529 college savings accounts provide tax-free growth on contributions, allowing families to reduce their exposure to income and capital gains taxes," they wrote in the newsletter. Expenses that qualify as being for education can be withdrawn tax-free. Unlike UGMA and UTMA accounts, the college savings accounts are owned by the parent.