Kiddie Tax: What Every Parent Should Know

Parents want to provide for their children's financial needs, and setting aside money in an investment account can be a great way to get kids off to a good start with their finances. How you set up an account for a child can have big tax implications, though. If you just move forward without thinking about the consequences, you can get a surprise at tax time.

One particularly confusing situation can come up when parents put money in custodial accounts for their children. In this case, a provision called the kiddie tax can apply to the investment income that those custodial accounts generate. The general idea behind the kiddie tax is to prevent parents from using their children as tax shelters, but there can actually be opportunities to save on taxes while staying within the provision's rules.

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Source Fool.com