Tax law change impacts kiddie tax and Roth IRAs
Thursday, June 1st, 2006
Categorized as: Savings Bond taxes
On May 17, President Bush signed H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005, also known as TIPRA.
Although the name says “tax increase prevention,” the law increases taxes for some families because it raises the age for the kiddie tax to 18 from 14 – retroactively to January 1, 2006.
What’s this about? Tax law says that children who have investment income should be taxed at their parent’s tax rate rather than their own after their income passes a threshold amount – currently $1,600.
Previously, for purposes of this tax law, a “child” was someone under 14. Kids 14 and older could pay tax on their investment income at their own tax rate, which was typically a lot lower than the parental rate. The new law raises the cutoff age to 18.
Since the first edition of my book, I’ve been explaining how to take advantage of the kiddie tax using Savings Bonds. This change will impact anyone who has been following that advice.
The tax law also changes the rules for Roth IRAs. On May 28, Helen Huntley of the St Petersburg Times explained these changes in Roth IRA might fit your plan to retire. The indented section below is from her article.
There are two ways to get money into a Roth IRA – annual contributions or rolling over money that’s in a traditional IRA.
Until now, high-income people haven’t been allowed to put money in Roth IRAs. To contribute to a Roth, your income must be less than $110,000 if single or $160,000 if married filing jointly. To convert money from a regular IRA to a Roth, your income must be less than $100,000 not including the amount of the conversion whether married or single.
Starting in 2010, anybody can do a conversion by paying the taxes on the money at their regular income tax rates. No 10 percent penalty applies. As an added bonus, if you do it in 2010, you can spread the tax payment over two years.
Huntley goes to explain the factors you have to consider to determine whether converting makes sense.