by Joe Hurley, founder, Savingforcollege.com

Our daughter Megan turned 21 this summer. She is also a full-time college student and expects to stay in school for at least two more years. Because of a new tax law enacted back in May, next year (2008) Megan becomes subject to the federal Kiddie Tax on her "unearned income" in excess of $1,700 (or $1,800 if a tax inflation adjustment kicks in). This assumes her "earned income" in 2008 does not exceed one-half her total support for the year.

We haven’t had to worry about the Kiddie Tax for Megan for eight years, since she was 13 years old. Even when the Kiddie Tax age trap was increased in 2006 to include children up through the age of 17, she escaped as a 19-year old.

Do you have any clients with children who are now between the ages of 18 and 22? If you do, make sure they are now planning for the Kiddie Tax. Because these children are not subject to the Kiddie Tax in 2007, it may make sense to trigger capital gains in the child’s name before December 31 to take advantage of low tax brackets. That opportunity disappears next year.

Our daughter is selling the appreciated stocks and mutual funds that came to her through UGMA accounts set up years ago from grandparent gifts and inheritances. My wife and I might even look for stock gains in our own taxable portfolio and make gifts of those securities to Megan in order to trigger gains in her 5 percent capital gains bracket. After all, there are still tuition bills to pay. (Of course we’ll need coordinate all this with our 529 withdrawals.)