Should you save for a child’s education in your name or theirs?

There are three potential drawbacks to saving money for a child’s education under his or her own name: the kiddie tax, federal financial aid rules, and control issues. First, the kiddie tax. At one time, saving money for college in a child’s name was recommended because of the tax saving opportunities that resulted when children were taxed at their own rate on all their unearned income. However, Congress partially closed this loophole some years ago with passage of special rules commonly referred to as the “kiddie tax” rules. Under the kiddie tax rules, a child’s unearned investment income over a certain amount is taxed at trust and estate income tax rates. In 2018, this amount is $2,100 — the first $1,050 is tax free and the next $1,050 is taxed at the child’s rate. The kiddie tax rules significantly reduce the tax savings potential for holding assets in a child’s name. The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. To lessen the impact