ExpertMedium1 markMultiple Choice
CPA · Question 03 · Area I: Individual Compliance and Planning
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?
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?
Answer options:
A.
$320
B.
$450
C.
$833
D.
$1,184
How to approach this question
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).
Full Answer
C.$833✓ Correct
C
IRC §1(g) (Kiddie Tax). Step 1: Taxable Income = $4,500 - $1,300 = $3,200. Step 2: Net Unearned Income taxed at parents' rate = Unearned Income - (2 * Standard Deduction amount used for threshold) = $4,500 - $2,600 = $1,900. Step 3: Tax calculation. First $1,300 of taxable income at 10% = $130. Remaining $1,900 at 37% = $703. Total Tax = $833.
Common mistakes
Applying the parents' rate to the entire taxable income or forgetting to subtract the standard deduction before calculating tax.
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