Cash In on Kids at Tax Time

Capitalize on Your Children

If your children already have income, good for them.

The rules are hairy but in a nutshell, the first $800 is a freebie. So if your kid has a couple hundred in interest and dividends, you don't even have to bother reporting it.

The next $800 is taxed at the child's rate, or the lowest tax bracket rate, of 10%. Anything after that is taxed at the parent's rate until your child hits 14.

Then your kid is taxed on his own. Presuming he doesn't have a lot of income, he'll still only be subject to the 10% income tax bracket. To capitalize on this rate, consider selling some short-term securities in your child's name. Then your child, a.k.a. you, will only owe 10% tax on the income vs. what could be as high as 35% on your federal return if you sold them in your name.

Just be aware of alternative minimum tax issues, warns Mary Gutierrez, a tax research specialist at H&R Block. "Kids are subject to AMT laws at lower amounts than we are." For kids under 14, income in excess of $5,750 could be subject to AMT, says Gutierrez. Most adults don't have AMT issues until they hit at least $40,000. So run the numbers before you have Junior sell some of your holdings.

Other Provisions

If you're a single parent, consider filing under head of household instead of single status. As long as you provide the household where your child lives, you can qualify for lower tax rates.

If you adopted a child recently, you may be able to take a tax credit of up to $10,390 for qualifying expenses paid to adopt an eligible child (including a child with special needs), says Gutierrez. The credit generally is allowed for the year following the year in which the expenses were incurred.