Question

Exercise 3-26 (Algorithmic) (LO. 7)

In 2017, Simon, age 12, has interest income of $860 and dividend income of $4,700. He has no investment expenses. His parents have taxable income of $87,000 and file a joint tax return. Assume that no parental election is made.

Click here to access the 2017 tax rate schedule. If required, round the tax liability the nearest dollar.

Net unearned income is $. Allocable parental tax is $. Simon's total tax is $.

Answer 1

In 2017, net unearned income of a dependent child is computed as follows:

Unearned income

Less:          $1,050

Less:          The greater of

·      $1,050 of the standard deduction or

·      The amount of allowable itemized deductions directly connected with the production of the unearned income

Equals:      Net unearned income

If net unearned income is zero (or negative), the child’s tax is computed without using the parents’ rate. If the amount of net unearned income (regardless of source) is positive, the net unearned income is taxed at the parents’ rate. The child’s remaining taxable income (known as no parental source income) is taxed at the child’s rate.

Simon’s net unearned income is $3,460, computed as follows:

Unearned income: $5,560 ($860 + $4,700)

Less: $1,050

Less: $1,050 of the standard deduction

Equals: $3,460

2.

Allocable parental tax = Tax on (parent's income all children's net unearned income subjected to kiddie tax) - tax on parent's income.

Parent's income Simon’s unearned income = $87,000+$3,460 = $90,460. Tax on this amount for 2017 = 10% of $18,650 + 15% of ($75,900 - $18,650 + 25% of ($90,460- $75,900) = 1865+8587.5+3640 = $14,092.5

Tax on parents income of $87,000= 10% of 18,650 + 15% of (75,900 - 18,650 + 25% of (87,000 - 75,900) = $13,227.50

Thus allocable parental tax = $14,092.5- $13,227.50= $865

3. Simon's total tax = $780

Net unearned income is	$3,460
Allocable parental tax is	$865.00
Simon's total tax is	($865+$105)=$970

Simon’s taxable income:

Adjusted gross income: $5,560

Less: Standard deduction: $1,050 (limited)

Less: Personal exemption: $0 (none allowed)

Equals: Taxable income: $4,510

Less: Net unearned income: $3,460

Non-parental source income: $1,050

Tax on $1,050 is $105 ($1,050 × 10%). Simon’s total tax is $970 ($865 + $105).