Most children don't have a lot of income and so don't have to pay much in income tax. But one provision meant to prevent parents from using their kids as tax shelters could stick children with higher tax bills this year.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how the so-called "kiddie tax" provisions combine with new surtaxes on net investment income to raise kids' tax bills. Essentially, once children earn more than $2,000 in investment income, they have to pay taxes at their parents' higher rates. Dan notes that if the parents are subject to the net investment income surtax of 3.8%, then the kiddie-tax rules will impose that surtax on their children's returns. Dan concludes that it's important to know the limits on taking advantage of your children's lower tax rates to avoid paying more tax than you need to pay.