ExpertMedium1 markMultiple Choice
CPA · Question 05 · Area I: Individual Compliance and Planning
A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard deduction for a dependent with no earned income is $1,250 (stated). The next $1,250 is taxed at the child's rate. Any remaining unearned income is taxed at the parents' marginal rate. If the parents' marginal rate is 37% and the child's rate is 10%, what is the child's tax liability?
A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard deduction for a dependent with no earned income is $1,250 (stated). The next $1,250 is taxed at the child's rate. Any remaining unearned income is taxed at the parents' marginal rate. If the parents' marginal rate is 37% and the child's rate is 10%, what is the child's tax liability?
Answer options:
A.
$375
B.
$500
C.
$1,050
D.
$1,850
How to approach this question
Follow the Kiddie Tax steps: 1. Gross Income - Standard Deduction = Taxable Income. 2. Separate Taxable Income into 'Child's Rate Portion' (statutory amount) and 'Parents' Rate Portion' (remainder). 3. Calculate tax on each portion and sum.
Full Answer
C.$1,050✓ Correct
Under IRC §1(g) (Kiddie Tax), net unearned income above a threshold is taxed at the parents' rates. Total Income: $5,000. Less Std Ded: $1,250. Taxable: $3,750. First $1,250 taxed at child's rate (10%) = $125. Remaining $2,500 taxed at parents' rate (37%) = $925. Total Tax = $125 + $925 = $1,050.
Common mistakes
Applying the parents' rate to the entire taxable income or forgetting the standard deduction.
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