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Income Shifting Strategies


Definition of "Income-shifting strategies"

Ownership of tax-free or tax-deferred investments by a child or for a child, given that these investments will not reach maturity before the child attains at least age 14. The objective is to shift investment producing current income from high-tax-bracket adults to low-tax-bracket children. Possible means of achieving this objective would be the utilization of the following investment instruments:

  1. Municipal bonds interest earned is not subject to federal or state taxes.
  2. Savings bonds U.S. EE savings bonds that have a maturity date after the child attains age 14 these bonds guarantee payment of85% of the average interest rate of U.S. Treasury notes and bonds subject to a minimum guarantee rate of 6%. These bonds must beheld for at least five years for the full interest rate to apply.
  3. PERMANENT LIFE INSURANCE earnings accumulate on a tax-deferred basis with the possibility of avoiding taxes on the accrued earnings if the policy remains in force until the insured's death.
  4. DEFERRED ANNUITY this instrument offers the same tax-deferred treatment as life insurance.
  5. Growth equities taxes need not be paid on "paper gains;" taxes on gains are paid only after stock is sold.
  6. Custodial account parent retains control of the asset owned by the child until the child reaches the age of majority. The first $1000of income in the account is taxed at the child's rate (if child is less than age 14), and any additional income is taxed at the parent's rate. When the child reaches age 14, all income in the account becomes taxable at the child's rate.



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