Question

Unearned Income of Minor Children and Certain Students (LO 6.4)

Brian and Kim have a 12-year-old child, Stan. For 2018, Brian and Kim have taxable income of $52,000, and Stan has interest income of $4,500. No election is made to include Stan’s income on Brian and Kim’s return.

a. For purposes of the tax on a child’s unearned income, calculate Stan’s taxable income.

b. Calculate Stan’s net unearned income.

c. Calculate Stan’s earned taxable income.

d. Calculate Stan's tax for 2018

Answer 1

To calculate taxes related to a minor child's unearned income, one must consider standard deductions, net unearned income, and tax liability under U.S. law, taking into account any applicable tax laws like the Kiddie Tax.

Step-by-step explanation:

The question is related to the tax treatment of unearned income of minor children and requires calculating various tax-related amounts for a child named Stan with interest income. The concepts of taxable income, net unearned income, and tax liability for minors under U.S. tax law are being applied.

• Stan's taxable income would be his gross unearned income minus a standard deduction amount specific to minors for unearned income.
• Stan's net unearned income is his total interest income less the standard deduction for a dependent minor's unearned income.
• As there is no indication Stan has any earned income from employment or a business, Stan's earned taxable income would be $0.
• The calculation of Stan's tax for 2018 would involve applying the Kiddie Tax rules, which tax a child's unearned income above a certain threshold at the parents' marginal tax rate.

Without the specific numbers for the standard deduction and tax brackets in 2018, this response does not include actual tax calculations, as these amounts are annually adjusted for inflation and tax law changes.

Answer 2

a. Stan's taxable income is $4,500. b. Stan's net unearned income is $4,500. c. Stan does not have any earned taxable income. d. Stan's tax for 2018 is $450.

Step-by-step explanation:

a. To calculate Stan's taxable income for the purpose of the tax on a child's unearned income, we need to consider the threshold amount. In 2018, the threshold amount is $2,100. If a child's unearned income exceeds this amount, it is subject to tax. Stan's interest income is $4,500, which is higher than the threshold amount. Therefore, Stan's taxable income is $4,500.

b. Net unearned income is calculated by subtracting certain deductions and the threshold amount from the child's unearned income. In this case, there are no deductions to consider since Stan's unearned income is interest income only. Thus, Stan's net unearned income is $4,500.

c. Earned taxable income refers to income that a child earns through employment or self-employment. Since Stan's income is from interest and not earned through employment, he does not have any earned taxable income.

d. To calculate Stan's tax for 2018, we need to determine the tax rate for his unearned income. For a child with a net unearned income of $4,500, the tax rate is 10%. Therefore, Stan's tax for 2018 is $4,500 x 10% = $450.