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Previously, I posted about how important it is to establish savings accounts for children.  The next logical question is "Who gets taxed on that income?"  The answer is that it might be you.

Yes, unearned income (which includes interest and dividends) earned by children may be taxable to the parent or guardian under the so-called Kiddie Tax rules.  That's a sobering thought since most adults are taxed at a higher rate than children would be, and the difference can be substantial.  Don't panic, though.  The tax doesn't apply to children who have earned minimal interest and dividends.  Unearned income which is less than $1700 per year can still be taxable to the child at the child's own tax rate, usually around 10%.  So, those "fun money" savings accounts are safe.

And there's an important change to be aware of:  prior to 2006, the tax only applied to children under the age of 14 who were considered dependents.  Recent changes to the law, retroactive to January 1, 2006, have increased the age to 18.