Congress Closes 'Kiddie Tax' Loophole

The maximum capital gains tax rate on assets held for at least one year, and sold for a profit, is 15% -- no matter what your ordinary income tax bracket (with a few exceptions for collectibles and some other assets). But for those in the lowest two brackets, for tax year 2007, the maximum tax on capital gains is only 5%.

(For 2007, on an individual return, that 10% bracket applies to those who have taxable income of less than $7,825. The 15% tax bracket tops out at taxable income of $31,850.)

In 2008, it would have been an even better deal, because next year the capital gains tax rates will drop to zero -- yes, you read correctly, 0% -- for those in the lowest two tax brackets!

This zero rate will be particularly helpful to low-income senior citizens who may have to sell long-held stocks to pay living expenses. Now parents who want to transfer appreciated stocks to low-income kids -- who would be able to cash in at the lowest or zero capital gains rates -- will find themselves locked out of this deal.

Kids in High Brackets

Bye, bye tax loophole. Starting in tax year 2008, those kiddies under 19, or still in school, can file their own return but will still have to pay tax on unearned income at their parents' rate.