Congress just tightened up the tax breaks on kids' savings accounts, but it's hardly game over for parents who know how to manage their family money.
There are still plenty of useful strategies out there, says Deborah Fox, a San Diego financial planner who specializes in helping well-to-do families make the most of their college savings. Each case has to be looked at individually.
What Congress did was extend the so-called kiddie tax, which requires the taxing of children's investment income at their parents' rate.
The law was conceived about 20 years ago to stop parents from sheltering money in their kids' names just to avoid taxes, but it had only applied to children through the age of 13. Now it affects kids until they turn 18.
But there's still some benefit to kids having a bit of money. Their first $850 of unearned income (that is, capital gains, interest, dividends and the like) is taxed at their own rate, perhaps as low as 5 percent. Above $850, they pay the same rate as their parents do.
That means the crucial pre-college years of 14 through 18 now require some alternative planning. Here are some moves to make.
-- Hire your child. If you have your own business, the planning opportunities here are enormous. You can hire your kids for the summer and write off their income as a business expense. Because their salary income is taxed at their own rate, there are savings there.
-- Compound those savings by opening an IRA for your children with their earnings. They'll probably qualify for a tax-deductible IRA, so you can come close to eliminating their taxable income.
If they don't make much, it might be better for them to use a Roth IRA. Although contributions are made with after-tax money, they're not taxed again when they come out. (Roth IRA income would be taxed if it were used for college.)
-- Even if you don't have a business, you can hire your children to do housework and lawn care, and they can still set up an IRA to avoid taxes on their income. You just can't write it off. They can use those IRAs to help pay for school.
-- Get money out of their names. Taxes aren't the worst of those childhood savings accounts. The more money kids have, the less likely they are to qualify for federal financial aid when it comes time to pay those college bills. You can pull money out of their accounts to pay for special items like summer camps and X-Boxes. Just make sure you're saving a corresponding amount in a more favorable account.
-- Take another look at those 529 and Coverdell savings plans. Congress did give kids one break: It said they could fund these accounts with their own money, but it would still count only as the parents' asset when it got crunched for financial aid. That's more favorable than the treatment those contributions got in the past, so it might be worth using a child's money to feed one of those accounts.
Don't overfeed it though: Fox says many people put too much into their 529 plans and end up paying taxes and penalties when they withdraw the money.
-- Be generous when they do go to school. Once your children turn 18, you can start laying money on them to pay for school and really save yourself some money. Give them appreciated stock as a gift, and they can sell it and pay their own lowly tax rate on the gains. They can use that money to pay for school directly -- and possibly receive education credits and deductions that you might earn too much to qualify for.