In the late 1980s Congress enacted a law that was intended to prevent parents from avoiding income tax by shifting the income producing asset to a child.  Basically, the law discourages parents from transferring assets to their children by taxing investment income at the parent's tax rate rather than the child's lower tax rate.  The tax originally applied to children younger than 14, but was changed last year so that it applied to children age 17 and younger.  In 2007 the child's first $850 in investment income (including capital gains) is tax free.  The next $850 in investment income will be taxed at the child's rate.  Any investment income over $1,700 will be taxed at the parent's rate.

Starting January 1, 2008 the tax will be further expanded to apply to children age 18 and younger, as well as dependent, full-time students under age 24.  Students who recieve more than half of their support through earned income will not be affected by the change.

If you have children age 18 through 23 by the end of 2007, they can still take advantage of their lower tax rates.  If you are planning on liquidating low basis assets to pay for tuition, there is still some time for some planning.  If the low basis assets are transferred to a child age 18 or older, and sold in 2007, the child can take advantage of the 5% tax rate on long term capital gain, provided the child is in the two lowest tax bracket.