ExpertMedium1 markMultiple Choice
CPA · Question 11 · Area I: Individual Compliance and Planning
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?
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?
Answer options:
A.
$1,018
B.
$1,018
C.
$1,850
D.
$500
How to approach this question
Layer the income: 1. Standard deduction (tax-free). 2. Next threshold (child's rate). 3. Remainder (parents' rate). Sum the tax.
Full Answer
B.$1,018✓ Correct
B
IRC §1(g). Total Unearned Income: $5,000. Less Standard Deduction ($1,300) = $3,700 taxable. Less amount taxed at child's rate ($1,300) = $2,400 net unearned income taxed at parents' rate. Tax = ($1,300 * 10%) + ($2,400 * 37%) = $130 + $888 = $1,018.
Common mistakes
Applying parents' rate to all taxable income; forgetting the slice taxed at the child's rate.
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