 Hello and welcome to this session in which we will discuss the kiddie tax. What is the big idea of the kiddie tax? Well simply put, parents, they cannot shift or assign their income to their kids. So if you work for a company, you cannot tell your employer, why don't you write this check or assign this check to my kids and they will pay taxes on it. Kids are in a lower tax brackets than the parents so you cannot do that. However, when it comes to unearned income, so if you have a CD in the bank or some stocks, some unearned revenue, you can shift some of that income to your kids. Now obviously Congress catch up on that and say well guess what? We're going to create this kiddie tax where it limits the shifting of unearned income. Simply put, here we have the griffins. If Peter has a lot of money, the idea is if Peter would put some of that money in Megs' name, Chris, Brian, well I don't think you can assign any, not Brian, you cannot assign anything to the dog with no social security, then these individuals for example, they'll pay 10%, 10%, 10% rather than the parents, their tax rate could be just for the sake of illustration, 25%. So you can assign some but not much, you are limited. So what are the rules for the kiddie tax? Well, it applies to any child who has not reached the age of 19 and if they're over 19, 24 but they're full-time students, the child did not provide more than 50% of their own support. Simply put, if the child is independent, in other words, the child then they can take care of themselves and they have unearned income, then it becomes their own unearned income. Now, when does the kiddie tax kick in? Well, if they have more than 2300 unearned income. Now this number 2300 changes from year to year, so keep that in mind. So if you're looking at this recording in 2024, 2026, 2028, the number will be different but this is when the kiddie tax will kick in. Now also the kiddie tax don't apply if that child is married, filing jointly. Simply put, someone who's in college, maybe they could get married. Once that happens because they're filing with someone else, the kiddie tax no longer apply. Now we need to know how do we compute the kiddie tax? Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Well, we're going to look at the kiddie tax when there's no earned income. So the individual has no earned income and would look at the kiddie tax where the individual has earned income. Now for the CPA exam usually they only show you no earned income examples but I want to show you both just in case. So the unearned income and access of $2,300 is subject to the kiddie tax. So if you have unearned income reported more than $2,300, the amount above goes to the parent's tax rate. Now, how do we come up with this $2,300? Why is it above $2,300? Well, the first $1,150 is tax-free, so zero percent on it. The second $1,150 which is $1,150 plus $1,150 equal to $2,300. The second one is the standard deduction for the child. The standard deduction will wipe out the second $1,150. Now, how did we come up with this second $1,150? I'm going to put it in a different color, that's your standard deduction. The standard deduction of a child is $750 plus $400. Simply put, if they have earned income plus $400 giving which is $1,150. So this is how we come up with the second $1,150. Anything above $2,300 which is the first $1,250 plus the second $1,150 is tax on the parent level. So the first $2,300 is wiped out. How it's wiped out? Well, the first one is basically the government says it's tax-free. The second $1,150 is wiped out through the standard deduction. Now, why did I break down the standard deduction? You're going to see why I explain the standard deduction in a moment. Now, how do we report this income? Well, we have two options. Well, we could have a separate return for the child or the parent can allocate the income to their own return. So how would you report if it's more if you have a kiddie tax? Well, report it on the child and pay the taxes or assign the income to the parent as assigned interest and dividend and they will pay the taxes as well. Let's look at earned income. What does earned income? It means when the child is actually working. When the child is actually working, they have a different standard deduction. Their standard deduction is $750 if they earned more than $750. It's $750 plus $400. Well, $750 plus $400 is $1,150. So if they earn less than $750, they will get the $1,150. Now, if they earned $6,000 or $7,000, their standard deduction is $7,000, which is earned income plus $400. It becomes $7,400. This becomes their standard deduction. Max up to $12,950, which is the standard deduction for a particular year, whatever that standard deduction for a particular year for a single individual. It happens to be for the purpose of my illustration, $12,950. This number could change. Now, the best way to illustrate this is to actually look at an example where we have no earned income and earned income, including given a scenario with the kiddie tax. Let's take a look at the first example. Adam is single, 17 years old. He reported an earned income of $6,200. Now, most likely, Adam is 17 years old. He should not have an earned income of $6,200 unless Adam is a famous actor and that's how he earned the money. Otherwise, it's his parents' money. And we're told here, Adam does not provide more than half of his support. Therefore, he's not really a famous actor. It's his parents' money. So how is that money taxed? Well, $6,200 exceed the $2,300 allowed for that particular year of unearned income. So the kiddie tax will kick in. So Adam will deduct $1,150 because the first $1150 is not taxable. The second $1150 is his standard deduction. Then what's left is $3,900. So $3,900 is taxed at the parent level. Now, let's assume Adam reported $6,200 and Adam earned from a part-time job $3,000. Now, Adam has unearned income and earned income. What do we do under those circumstances? We're going to add both and we're going to come up to gross income of $9,200. From the gross income, we are going to deduct Adam's standard deduction. How much is Adam's standard deduction? It's earned income plus $400 as long as it doesn't exceed the standard deduction for single for that particular year. Well, earned income is $3,000 plus $400 is $3,400. Therefore, $9,200 minus the standard deduction will give us Adam's taxable income of $5,800. Now, we're going to compute the unearned income separately. Unearned income, we have $6,200 minus the $2,300. That's allowed to be tax-free. What's left is $3,900. This amount is taxed at the parent level, the $3,900. So now what's left is $5,800 is the taxable income and the parents absorbed $3,900. What's left on Adam's tax return is $1,900 and most likely it will be 10% up to that income level. I'm assuming whatever the tax rate happens to be for that income level, most likely is 10%. What should you do now? 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