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Discussion:Preggers

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Discussion Forum Index --> Advanced Tax Questions --> Preggers


Discussion Forum Index --> Tax Questions --> Preggers

Ckenefick (talk|edits) said:

19 March 2014
She got preggers at a young age, at age 19. She is now 21 and is back in college, enrolled as a full-time student. Her kid, a girl, is now 2 years old. Good news is that granny and gramps have some dough. They've gifted some large sums to their daughter and granddaughter. So much so that, for 2013, daughter and granddaughter each have substantial unearned income, mostly interest income. Daughter also works a night job at the Club, so daughter has some earned income, but it doesn't exceed 1/2 of her support. In addition, kid's (granddaughter's) unearned income far exceeds daughter's earned plus unearned income.

Of course, granny and gramps support their daughter and granddaughter, on top of the financial gifts, although daughter and granddaughter live in their own home. Daughter was never married. The guy that got her preggers is a deadbeat druggie and doesn't work (at least legally) and probably doesn't even file a tax return.

How does the Kiddie Tax work in this situation?

Taxalmancer (talk|edits) said:

March 19, 2014
In your case, the 21-year-old is subject to the Kiddie Tax pursuant to IRC Section 1(g)(2). The Kiddie tax will be based upon a parent's (or the parents') tax information IRC Section 1(g)(3) and which parent will be based upon IRC Section 1(g)(5). There is no provision I am aware of that would tax the unearned income at the grandparents' tax rate.

The 21-year old would have to know the tax information of her parents and if not known, there are procedures where she can get that information from the IRS.

Taxalmancer (talk|edits) said:

March 19, 2014
Half out the door to a meeting and can't fully respond now. It would appear the 21-year old will be subject to the Kiddie Tax based upon the custodial parent (within the meaning of Section 152(e) if her parent's are unmarried or the parent with the higher income if they live apart.

What's the situation of the 21-year-old's parents? Her mom lives with her. What about her dad? Are they married?

Ckenefick (talk|edits) said:

19 March 2014
Daughter and granddaughter live together.

Granny and gramps live together...separately from daughter and granddaughter.

What about Kiddie Tax of the granddaughter?

Nilodop (talk|edits) said:

19 March 2014
Does the 2-year old have a paper route?:-}

Does Q and A 8 of the reg. describe your situation?

Will I be sorry I jumped in here?

Ckenefick (talk|edits) said:

19 March 2014
Please copy Q&A #8 Lenny...

Will I be sorry I jumped in here?

Probably not. This is a very common fact pattern and we all need to know the answer for future reference.

Nilodop (talk|edits) said:

19 March 2014
Here it is, plus an example.

Q-8. Will a child be subject to tax under section 1(i) on net unearned income that is attributable to gifts from persons other than the child's parents or attributable to assets resulting from the child's earned income? A-8. Yes. The tax imposed by section 1(i) applies to all net unearned income of the child, regardless of the source of the assets that produced such income. Thus, the rules of section 1(i) apply to income attributable to gifts not only from the parents but also from any other source, such as the child's grandparents. Section 1(i) also applies to unearned income derived with respect to assets resulting from earned income of the child, such as interest earned on bank deposits. Example 5. A is a child who is under 14 years of age at the end of the taxable year beginning on January 1, 1987. Both of A's parents are alive at the end of the taxable year. During 1987, A receives $2,000 in interest from his bank account and $1,500 from a paper route. Some of the interest earned by A from the bank account is attributable to A's paper route earnings that were deposited in the account. The balance of the account is attributable to cash gifts from A's parents and grandparents and interest earned prior to 1987. Some cash gifts were received by A prior to 1987. A has no itemized deductions and is eligible to be claimed as a dependent on his parent's return. Therefore, for the taxable year 1987, A's standard deduction is $1,500, the amount of A's earned income. Of this standard deduction amount, $500 is allocated against unearned income and $1,000 is allocated against earned income. A's taxable unearned income is $1,500 of which $500 is taxed without regard to section 1(i). The remaining taxable unearned income of $1,000 is net unearned income and is taxed under section 1(i). The fact that some of A's unearned income is attributable to interest on principal created by earned income and gifts from persons other than A's parents or that some of the unearned income is attributable to property transferred to A prior to 1987, will not affect the tax treatment of this income under section 1(i). See A-8.

Ckenefick (talk|edits) said:

19 March 2014
Re: Earned income: Here's what kid argues...I earned the money myself. If I invest it, the investment earnings should be traced to my earned income, so that portion of the investment earnings shouldn't be subject to the Kiddie Tax. IRS Response: No.

With respect to "gifts from persons other than kid's parents:" Here's what kid argues: Kiddie tax is to avoid shifting income/assets from parents to kids. Moreover, Kiddie Tax rate is based on "parental" or parents rate...not on "grandparental" rate or "unrelated donor's tax rate." Therefore, Kiddie Tax shouldn't apply to investment earnings stemming from these types of gifts. IRS Response: No.

Spell Czech (talk|edits) said:

19 March 2014
"Here's what the kid argues...."

Tell the kid, who's a full-time college student now and a part-time worker living on and supporting her daughter on money from her parents to get her college degree and then go to law school and get her law degree and then join an established firm and find a rich client who will pay her handsomely to make these arguments in Tax Court or wherever. I think the regulation is quite clear. Whether it's fair or not isn't on the table, right here, right now.

Ckenefick (talk|edits) said:

19 March 2014
Whether it's fair or not isn't on the table, right here, right now.

Completely agree. The Q&A isn't on point, as it is directed towards the source of the funds giving rise to investment earnings.

What is on the table, however, is how the Kiddie Tax works in this case.

Start with what TaxAlmanacer says: Daughter will be subject to the Kiddie Tax. Okay, so we prep the 8615 as part of daughter's return. But what about granddaughter's return? Granddaughter is subject to Kiddie Tax as well, right? So, how do we work it...when we go to prep the 8615 on the granddaughter's return? Is grandaughter's 8615 based on her mother's return, which already has an 8615 attached to it, based on grandparents return?

Taxalmancer (talk|edits) said:

March 19, 2014
What I was trying to point out earlier is the Kiddie Tax is only attributable to the parent(s) taxable income. In the 2-year-old's case, she would reference to her mother's income for Kiddie Tax purpose. The 21-year-old would reference to her mother's taxable income (or possibly father's if the mom and dad are still married but living apart).

Whose income is the IRS referencing back to that is causing a Kiddie Tax?

Ckenefick (talk|edits) said:

19 March 2014
...she would reference to her mother's income for Kiddie Tax purpose.

Wouldn't we reference kid's 8615 to mother's income...and mother's tax...and ultimately, the change (increase) in mother's tax (due to kid's income)?

STG (talk|edits) said:

19 March 2014
You can elect to report the 2-year-old's income on the mother's as well.

Ckenefick (talk|edits) said:

19 March 2014
We have stock sale transactions and so forth.

STG (talk|edits) said:

19 March 2014
Well dang.

EatonCPA (talk|edits) said:

20 March 2014
And now we all know why the E-Trade baby kept getting his devices taken away ... he was making the parents' tax filings a nightmare!

Joan TB (talk|edits) said:

20 March 2014
I really LOVE the e-trade baby!!!!

Ckenefick (talk|edits) said:

20 March 2014
http://thedailybanter.com/2013/09/disturbing-story-of-the-month-mother-marries-son-in-zimbabwe/

How would the Kiddie Tax work in this situation?

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