My daughter will be hit with over $700 of fed tax because of the changes to the kiddie tax this year. Currently she has a 9 month no penalty CD with 92K in it earning 1.98%. Since she had over 5K of earned income I was thinking of closing out the CD and putting 5K in an IRA for her. This would more then offset the Fed tax. I was then thinking of putting the remainder in some other safe investment(tax free muni?).

1. If I close out the CD will she pay capital gains or just the int?
2. Any other recommendations as to where the put the remainder so we get hit with the tax next year?

Thanks.

Fortunately, there would not be any capital gains tax on the closing of the CD's assessed to either you or your daughter. I really don't agree that pulling out the monies from your daughter's CD is a smart thing unless you are planning to invest the proceeds into a 529 Education Plan. Other investments in this environment are an extremely risky proposition.

Also, I heard Tax Free Muni's may also be a risky strategy, just look at California Municipal Bonds!!! It is better to play safe in this environment, there is no clarity or visibility in the 1-2 years. CD's are the best short term option, I think your Daughter paid tax that was fairly high because her effective tax bracket was the same as your's, so I would not alter your long term strategy because of the $700 tax liability on the federal 1040!

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Hmmm. I really don't want to have to pay the $700 + in fed tax. She is only a freshman so this tax problem will occur for the next three years unless then change the tax code. I currently have a 529 for her. There must be something else I can do.