Question

Cindy, an 18-year-old full-time student, has $5,000 interest income from a trust established by her grandparents. Cindy also earned $6,000 working at a part-time job. She lives at home with her parents and has no itemized deductions.

a) What is Cindy’s taxable income and how much income tax does she owe for 2018?

b) How would your answers change if Cindy were age 24?

c) How much tax would be saved if she were age 24?

Answer 1

Starting in 2018, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,000. Thus, a child can earn up to$12,000 without paying income tax.but

If a child has both earned and unearned income, he or she must file a return for 2018 if:

-unearned income was over $1,050.

-earned income was over $12,000 ( standard deduction for 2018 ), or

-earned and unearned income together total more than the larger of (1) $1,050, or (2) total earned income (up to $12,000) plus $350.

Here, the unearned income of Cindy is $ 5000 (interest income) and earned income (part time job) is $ 6000.

total income is $ 11000 of which she can deduction of the allowable standard deduction for 2018 is the greater of: (1) $1,050 or (2) earned income + $350, not to exceed $12,000.

i.e. higher of 1) $ 1050 or 2) 6000+350 = $ 6350.

i.e. taxable income is 11000 - 6350 = $ 4650

Tax - consist on unearned income of $ 4650 of which

$ 2900 (5000-2100) is subject to taxed at the trust and estate tax rates under the Kiddie Tax rules.

$ 255 ( 2550 x 10 %) and $ 84 ( 350 x 24% ) = $ 339

and remaining $ 1750 (4650-2900) at regular rate for a single taxpayer i.e. 10% resulting tax $ 175

a) So tax amounts to 339+175 = $ 514 .

if she is of age 24 she will be taxed @ 10% i.e  at regular rate for a single taxpayer i.e

b) the tax will be 4650 x 10% = $ 465

c) tax saved would be if she were age 24 will be 514 - 465 = $ 49