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

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

Sep 1, 2019

In 2019, Nancy, age 15, earns $3,000 babysitting. She also has $2,800 in interest from her UTMA which is maintained for her college savings. How much of Nancy’s income is subject to the kiddie tax at the income tax rate for estates and trusts?

  1. $0
  2. $600
  3. $1,700
  4. $3,600

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Correct answer: B. $600

Instructor insight:

Only unearned income is subject to kiddie tax. The $2,800 in UTMA interest falls into this category. However, the $3,000 from babysitting is normal income and therefore is not subject to kiddie tax.

In 2019, the first $1,100 of unearned income is tax free and the second $1,100 of unearned income is taxed at the child's personal income tax rate. This means that any unearned income in excess of $2,200 is subject to kiddie tax at the estate and trust rate. Here's the math for the scenario presented in this question:

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

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 at the estate and trust rate. This question is not asking for total tax payable.

 

Topics: Practice Questions

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