Question

In 2017, Carson is claimed as a dependent on his parent's tax return. His parents' ordinary income marginal tax rate is 28 percent. Carson's parents provided most of his support.

What is Carson's tax liability for the year in each of the following alternative circumstances?  Use Tax Rate Schedule for reference.

a. Carson is 17 years old at year-end and earned $12,000 from his summer job and part-time job after school. This was his only source of income.

b. Carson is 23 years old at year-end. He is a full-time student and earned $12,000 from his summer internship and part-time job. He also received $5,000 of qualified dividend income.

Answer 1

Solution:-

a.

Carson’s tax liability is $565. Note that Carson has no unearned income and is not subject to the kiddie tax.

Description	Amount	Explanation
(1) Gross income / AGI	12,000	12,000 in wagesAll earned income
(2) Standard Deduction	(6,350)	Not subject to kiddie tax limitations—no unearned income
(3) Personal exemption	0	Claimed as dependent on parents’ return
(4) Taxable income	5,650	(1) + (2) + (3)
Total tax	565	5,650 * 10%

b.

Carson’s tax liability is $1,030. Carson is subject to the kiddie tax because he is a full-time student under age 24 and has unearned income greater than $2,100.

Description	Amounte	Explanation
(1) Gross income/AGI (all unearned income)	17,000	12,000 earned income & $5,000 unearned income (qualified dividends)
(2) Minimum standard deduction	1,050	Minimum for taxpayer claimed asdependent on another return
(3) $350 plus earned income	6,350	350 + 12,000 earned income (not to exceed $6,350 regular standard deduction)
(4) Standard deduction for dependent on another tax return	6,350	Greater of (2) and (3)
(5) Personal exemption	0	Claimed as dependent on parents’ return
(6) Taxable income	10,650	(1) – (4) – (5)
(7) Gross unearned income minus $2,100	2,900	5,000 dividends - 2,100
(8) Net unearned income	2,900	Lesser of (6) or (7)
(9) Parents’ preferential rate	15%	Because his parents’ marginal tax rate on ordinary income is 28%, their rate on preferential income is 15%
(10) Kiddie tax	435	(8) x (9)
(11) Taxable income taxed at Carson’s rate	7,750	(6) – (8)
(12) Preferential income taxed at Carson’s tax rates	2,100	$5,000 Dividends – (8)
(13) Tax on preferential income	0	(12) x 0% (Carson’s tax rate would be 10 percent if it were ordinary income, so he qualifies for 0 percent rate on dividends).
(14) Taxable income tax at Carson’s ordinary tax rates	5,650	(11) – (12)
(15) Tax on ordinary income	565	(14) x 10%
Total tax	1,000	(10) + (13) + (15)

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