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    PracticeCPA®CPA TCP Practice Exam 3Question 05
    Hard1 markMultiple Choice
    Area I: Individual Compliance and PlanningTCPArea IGroup A

    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. Assume the standard deduction for a dependent is $1,300 and the next $1,300 is taxed at the child's rate. The parents' marginal tax rate is 37%. What is the tax liability for the child?

    Answer options:

    A.

    $370

    B.

    $1,020

    C.

    $1,369

    D.

    $500

    How to approach this question

    Apply the Kiddie Tax rules (IRC §1(g)). 1. Subtract standard deduction. 2. Subtract the amount taxed at child's rate. 3. Apply parent's rate to the remainder. 4. Add tax on the child's rate portion.

    Full Answer

    B.$1,020✓ Correct
    Total Income: $5,000. Less Standard Deduction: $1,300. Taxable Income: $3,700. Under Kiddie Tax rules (IRC §1(g)), Net Unearned Income (NUI) is taxed at parents' rates. NUI = Total Unearned - (Std Ded + greater of Std Ded or itemized costs). Here, threshold is effectively $2,600 ($1,300 + $1,300). Amount taxed at parents' rate (37%) = $5,000 - $2,600 = $2,400. Tax = $2,400 * 0.37 = $888. Amount taxed at child's rate (assume 10% for lowest bracket) = $1,300 * 0.10 = $130. Total Tax = $888 + $130 = $1,018 (approx $1,020 depending on exact child rate assumption, usually 10%). Option B is the only mathematically consistent answer with the Kiddie Tax structure.

    Common mistakes

    Applying the parents' rate to the entire taxable income or forgetting the second $1,300 slice taxed at the child's rate.
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