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Is the new kiddie tax calculating properly?

Karen-Collopy
Level 2

5 year old receives $14,376 of social security and 1099R from the Navy for $8332 because dad passed away. The 1099R dist code is 7. The SS is not taxable, but the tax on the $8332 from the navy is $1220. 

Mom claims the son on her return, and has zero taxable income because her SS is not taxable (very little other income) and she has lots of itemized deductions for the house. 

I need to file the son's return separately, correct? We can't add his income onto her return where there are extra deductions to be able to absorb some of this income? Seems like the tax is high for the kid. Am I missing anything?

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rbynaker
Level 13

Just thinking out loud here.  If mom doesn't have much income, are you sure the son doesn't provide more than half of his own support?  Where did the $22K+ go?  I'd have mom do a support worksheet.

I would expect a distribution code 4 instead of 7, maybe I'm missing something but it's probably not relevant.

Correct, you cannot add the son's pension income to the mother's return.

Rick

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16 Comments 16
rbynaker
Level 13

Just thinking out loud here.  If mom doesn't have much income, are you sure the son doesn't provide more than half of his own support?  Where did the $22K+ go?  I'd have mom do a support worksheet.

I would expect a distribution code 4 instead of 7, maybe I'm missing something but it's probably not relevant.

Correct, you cannot add the son's pension income to the mother's return.

Rick

Karen-Collopy
Level 2
Ah, interesting. Mom's only income is about $4k of interest income, and $14,376  (same exact amount) of social security. Yes, I'm sure she's using his money to pay for the living expenses  of the household.  There is also a brother who receives the same exact amount as the 5 year old (he's 8), so mom is really only contributing 1/3.
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rbynaker
Level 13
Support is not really a function of income but there is very often a correlation between the two.  But maybe mom got a big life insurance payment and is using that money to support everyone.  Doesn't show up on a tax return as income but can definitely be spent for support.  So you really need to work through the support worksheet.
Karen-Collopy
Level 2
Great, thank you for taking the time to comment. I appreciate it!
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TaxGuyBill
Level 15
Just keep in mind that Mom does not need to provide over 50% of support.  The rule is that the kid can't pay for over 50%.

So if all three of them hypothetically paid 1/3, them mom can claim them because the kids don't pay for over 50% of their own support.
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rbynaker
Level 13
I'm not sure I would jump to that conclusion.  You have to do the support worksheet for each individual.

For your 1/3 "averaging" math to work, then you're saying that each kid supports himself 1/3, his brother 1/3 and mom 1/3.  Not sure I'd reach that conclusion.  But this is why they made us a worksheet.
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TaxMonkey
Level 8
It doesn't really matter, even if kid is not a dependent unless he is over 18 still subject to kiddie tax.
TaxGuyBill
Level 15
The original question is about Kiddie Tax, but the fact the mom has very low income put the dependency in question as well.
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rbynaker
Level 13
I don't see these much, so likely I'm missing something.  What's the standard deduction for someone who provides more than half of their own support (and therefore cannot be claimed as a dependent)?  ProSeries is giving me $12,000, is that not correct in this case?  $8,332 < $12,000 so TI=$0.  That just leaves a little AMT to deal with.
TaxGuyBill
Level 15
Good point.  If the kid was a non-dependent, they would get the full $12,000 Standard Deduction, so $0 of taxable income.

If the kid is a dependent, then they only get the lower $1050 (?) Standard Deduction for Unearned income, and the rest of the taxable income would be subject to Kiddie Tax.

Because mom has very low income (and therefore may not qualify for Child Tax Credit or EIC), it seems like in this situation the result could be better if the kid is NOT a dependent.
Karen-Collopy
Level 2
We toyed with this idea of mom not claiming the kids last year (first year we had to deal with this), but in the end, she wanted to claim them so as to not jeopardize any of their social security benefits. I don't know anything about whether she'd lose benefits if she's not claiming them as her dependents, but we went ahead and put them on her return and paid the tax on the boys' returns. Last year, the tax to the boys was about half, but this year, with the new rates I guess, the amount is $1200 per kid. I'm just trying to see if there is something that I'm missing. I'll work out the support worksheet though and go from there.
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rbynaker
Level 13
Claiming a dependent is a matter of tax law, not a matter of "want to".
TaxMonkey
Level 8

This question seems to be about the kiddie tax - not claiming the dependent.  Kid will be liable for kiddie tax.

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TaxMama
Level 2

This situation directly relates to the SECURE Act Kiddie Tax Changes for Gold Star Children & Others which was passed in late Dec 2019 (see below). I just don't know how to get Lacerte to reflect the correct (parent/individual) tax rate and not the trust/estate rates per Code Sec. 1(j)(4) , as amended by Act Sec. 501(a)). Can someone help?

Background:

New law. The SECURE Act repeals the kiddie tax measures that were added by the TCJA. As a result, the unearned income of children is taxed under the pre-TCJA rules and not at trust/estate rates. ( Code Sec. 1(j)(4) , as amended by Act Sec. 501(a))

Observation Under the Act's version of the kiddie tax, a child will once again be taxed at the
parents' rates on net unearned income if higher than the child's rates.
Observation This provision applies to all children who are subject to the kiddie tax, not just to
Gold Star children. However, it will particularly benefit children who receive payments under the
Survivor Benefits Plan (SBP), an insurance annuity provided by the Department of Defense. SBP
payments are often assigned to a child by a surviving spouse who is receiving Dependency and
Indemnity Compensation (DIC) from the Department of Veterans Affairs. This is done to avoid a
rule that requires DIC paid to a spouse to be subtracted from the spouse s SBP payments.
SBP payments are taxable and are unearned income for kiddie tax purposes. Before the TCJA
changes, the kiddie tax didn't take a large bite out of SBP payments, because the surviving parent
usually wasn't in a high tax bracket. Under the TCJA, the child's net unearned income was taxed at
trust and estate rates, which reached the top rate of 37% at taxable income over $12,500 for 2018.
As a result, some Gold Star children who received SBP payments saw a sharp increase in their tax
bill for 2018.
The Act also eliminates the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income. ( Code Sec. 55(d)(4)(A)(iii) , as amended by Act Sec.
501(b))
Effective: Tax years beginning after Dec. 31, 2019 (Act Sec. 501(c)(1)), but taxpayers can elect to apply it retroactively to tax years which begin in 2018, 2019, or both. (Act Sec. 501(c)(3))
Observation To decide whether to make this election, taxpayers should compare the tax for
2018 under the TCJA rules with the tax under the pre-TCJA rules that were reinstated by the Act.
Which set of rules provides the better result depends on the parents marginal rate and the amount
and type of the child's income. Taxpayers who have already filed for 2018 and who would benefit
from the election should file an amended return.
The AMT exemption amount change applies to tax years beginning after Dec. 31, 2017. (Act Sec.
501(c)(2))

As a side note, the SBP-DIC offset is being phased out from 2021-2023, so this will no longer be necessary to have the child be the beneficiary of SBP. The SBP benefit will supposedly automatically revert back to the spouse in 2023.

 

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TaxMama
Level 2

Oh, I figured it out! For Individuals, Screen 43 (8615 Options) select "Calculate tax using parent's rate." This changes it from trust/estate rate to individual rate. Woohoo!

Paula9
Level 1

Question, I have been reading on the Secure Act changes regarding Kiddie Tax, that it retroactively repeals the TCJA Kiddie Tax rate change for all children and young adults and reinstates the pre-TCJA Kiddie Tax calculation so that it’s once again based on the parent(s)’ marginal tax rate. I also read that:

In calculating the federal income tax bill for a dependent child (or young adult) who is subject to the Kiddie Tax, the child is allowed to subtract his or her standard deduction amount.

* For 2018, the standard deduction for an unmarried child is the greater of: (1) $1,050 or (2) earned income + $350, not to exceed $12,000.

* For 2019, the standard is the greater of: (1) $1,100 or (2) earned income + $350, not to exceed $12,200.

* For 2020, the standard deduction is the greater of: (1) $1,100 or (2) earned income + $350, not to exceed $12,400.

So it is proper to indicate on the CHILD's return that they are NOT Dependent of someone else, so that the software gives the child the STANDARD DEDUCTION?

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