Question 1

A taxpayer, age 15, has $4,500 of interest income and no earned income in Year 1. The taxpayer is claimed as a dependent by their parents. The standard deduction for a dependent with no earned income is $1,300. The next $1,300 is taxed at the child's rate. Amounts above that are taxed at the parents' marginal rate. If the parents' marginal tax rate is 37% and the child's rate is 10%, what is the child's tax liability for Year 1?

Accepted Answer

Calculate taxable income first (Gross - Standard Deduction). Then split taxable income: the amount up to the second threshold is taxed at the child's rate; the excess is taxed at the parents' rate (Kiddie Tax).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying the parents' rate to the entire taxable income or forgetting to subtract the standard deduction before calculating tax.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 4

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