Question of the Month (September 2019): Kiddie Tax Calculation

Posted by Mike Long, CFP®, ChFC®, CLU®

Sep 1, 2019

This year, Nancy, age 15, earns $3,000 babysitting. She also has $3,800 in interest from her UTMA, which she maintains for her college savings. How much of Nancy’s income is subject to the kiddie tax?

  1. $0
  2. $1,200
  3. $2,500
  4. $3,600

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Correct answer: B. $1,200

Instructor insight:

Only unearned income is subject to kiddie tax. The $3,800 in UTMA interest falls into this category. However, the $3,000 from babysitting is normal income and is not subject to kiddie tax.

In 2024, the first $1,300 of unearned income is tax-free, and the second $1,300 of unearned income is taxed at the child's income tax rate. Any unearned income in excess of $2,600 is subject to kiddie tax at the parent's highest marginal rate.

Here's the math for the scenario presented in this question:

$3,800 - $2,600 = $1,200.

Exam Tip:  Consider only what the question writer is actually asking. Answer the question! Not what you think the question should be! This question is asking for how much income is taxed as kiddie tax. This question is not asking for total tax payable.

 

Topics: Practice Questions

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