Question 1

A child (age 14) has $5,000 of interest income and no earned income in Year 1. The standard deduction for a dependent is $1,300. The first $1,300 of unearned income is tax-free, the next $1,300 is taxed at the child's rate, and the excess is taxed at the parents' marginal rate (Kiddie Tax). The parents' marginal rate is 37%. The child's rate is 10%. What is the child's tax liability?

Accepted Answer

Layer the income: 1. Standard deduction (tax-free). 2. Next threshold (child's rate). 3. Remainder (parents' rate). Sum the tax.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying parents' rate to all taxable income; forgetting the slice taxed at the child's rate.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

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