Question 1

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?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying the parents' rate to the entire taxable income or forgetting the standard deduction.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 2

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