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.

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

How would your answers change if Cindy were age 24?

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

NOTE: I have posted this question before but the answers for b & c were wrong.

Wrong answers: b) $465 c) $49.

Answer 1

Answer :

a). If Cindy is of 18 years old ,

Her taxable income for 2018 = $ 4,650

Tax owed by Cindy for 2018 = $ 514

Working Notes

1) For 2018, the standard deduction for a qualified dependent child is higher of earned income plus $350 or $ 2,100 subject to a maximum of $ 12,000.

Cindy's deduction - higher of

• $ 2,100 or $ 6,350 = $ 6,350

2). Cindy's Taxable income =( Unearned income + Earned income ) - Standard deduction = ($ 5,000 + $ 6,000) - $ 6,350 = $ 4,650

3). Since Cindy has unearned income she is subjectbto Kiddie tax on that portion of taxable income and at regular tax bracket of 10% on balance amount.

• Taxable portion of income subject to Kiddie tax = $ 5,000 - $ 2,100 = $ 2900

Kiddie tax - upto $ 2,550 at 10% = $ 255

Balance $ 350 at 24% = $ 84

• Taxable portion of earned income subject to regular tax = $4,650 - $ 2,900 = $ 1,750

Regular tax at 10% = $ 1,750 × 10% =$ 175

Total tax owed by Cindy = $ (255 + 84 +175) =$ 514

b) If Cindy is 24 years old, ( assuming she has no other taxable income)

Cindy 's taxable income after standard deduction will be $ 0

( As per the new tax laws, for 2018, the standard deduction for single tax payers has increased to $ 12,000)

c). If Cindy were of age she would have saved a tax of $514

( assuming she has no other incomes and has taken standard deduction )