Given the new laws on how children are taxed, it is less fun to be a child nowadays. Special rules (referred to as the kiddie tax) apply to the net unearned income of children. Generally, the rules apply if a child under the age of 18 has unearned income (for example, interest or dividend income) exceeding $1700. But any unearned income over $1,700 in 2007 is taxed at the parents’ presumably higher tax rate.

The age at which children are no longer taxed at their parents’ rate rose from 14 to 18 in 2005. A 2007 law expanded the kiddie tax rules to children who are 18 years old or who are full-time students over age 18 but under age 24. These expanded rules only apply to children whose earned income does not exceed one-half the amount for their support. This provision is effective for taxable years beginning after May 25, 2007 (the 2008 tax year for calendar taxpayers). The definition of a child includes natural, adopted, and step children. However, if you have kids who are 18 to 23 years old by the end of the year, you still have time to act before the latest change kicks in on Jan.1.

What does that mean for you? If your children are impacted, they can still take advantage of the 5 percent rate on long-term capital gains that’s available to taxpayers in the lowest brackets. If your child turns 18 this year, he is exempt from the current kiddie tax. So if he sells assets in his account by Dec. 31, he’ll benefit from the lowest tax rates to help pay his own tuition when he enters college as a freshman next fall.

You might also consider: 1) Giving appreciated assets to children 18 or older to sell before the end of the year, either to pay for college or to minimize your family’s tax bill; 2) Buying Series EE or Series I U.S. savings bonds helps, the interest isn’t taxed until maturity or redemption; 3) Look for tax-efficient equity mutual funds, which sell stocks infrequently and thus generate few taxable gains.

The latest change in the kiddie tax rules makes saving for education expenses through a 529 plan more attractive than ever. As long as the money is used for qualified college expenses, withdrawals from 529 plans are tax-free and avoid the kiddie-tax issue altogether.

The kiddie tax, while a valuable part of your tax strategy, can lead to some confusion. IRS Publication 929, Tax Rules for Children and Dependants is a helpful resource on the topic.

Forrest Johnson, III is a Financial Advisor & Vice President with Morgan Keegan & Company, Inc.