Does the KiddieTax apply here?

Does the Kiddie Tax apply for 2014?

Betty, age 43, has a daughter Sally, age 20. Betty receives child support from Sally's father. For 2013, Betty declared Sally as a dependant.

In January, Betty threw Sally out of the house, but "promised" to pay Sally's rent with the child support. Sally now lives in an inexpensive apartment. Sally does occasional baby-sitting under-the-table. Sally goes to a community college 3/4 time.

Betty's "promise" to pay the rent collapsed. Although Betty pays some of Sally's expenses, Betty uses most of the child support to pay her own expenses. To cover the shortfall, Grandpa stepped up and pays Sally's tuition and Sally's rent. Grandpa does this by giving Sally highly-appreciated stock which Sally sells to cover her expenses. For 2014, Sally's long-term capital gain will be about $12000.

For tax purposes, can Sally declare herself independent so that the long-term capital gain is taxed at Sally's tax rate (which is zero percent).

If the KiddieTax does apply, who pays it? Betty can be quite belligerent. Grandpa does Sally's tax return, and Betty isn't going to cooperate with Grandpa at all. Grandpa's inclination is that Sally should just declare herself as independent and see if the IRS complains.

Reply to
Rodney Farber
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It doesn't look like Betty can claim Sally as a dependent in

2014. A dependent has to pass the 'qualifying child' or 'qualifying relative' test and Sally doesn't appear to be a dependent under either test. See Publication 501.

Sally appears to be independent.

Reply to
BignTall

Sounds like a question from summer school final exam.

It is not an issue of Sally declaring herself independent. It is an issue of whether Sally is Betty's qualifying child and if not is she Betty's qualifying relative.

  1. As Betty threw her out, she is no longer considered to be residing with her mother and temporarily absent to attend college. As such, she can not be Betty's qualifying child.
  2. Sally's income exceeds the threshold to be a qualifying relative.

No one can claim Sally as a dependent.

Reply to
Alan

No, kiddie tax does not apply because Sally is over 18 and not a full-time student.

If you change the story to make her full-time instead of 3/4 time, then she does have to pay kiddie tax.

I don't know what you mean by declaring herself "independent." Kiddie tax applies whether or not the child is a dependent. The fact that she is not a dependent of anyone does not eliminate the kiddie tax. I don't see any provision by which someone can avoid the kiddie tax by declaring themselves "independent."

If the parent cannot or does not report the child's income on the parent's return, then the child pays the kiddie tax. If she's a full-time student, Sally would have to pay it.

Bob Sandler

Reply to
Bob Sandler

Betty, age 43, has a daughter Sally, age 20. Betty receives child support from Sally's father. For 2013, Betty declared Sally as a dependant.

In January, Betty threw Sally out of the house, but "promised" to pay Sally's rent with the child support. Sally now lives in an inexpensive apartment. Sally does occasional baby-sitting under-the-table. Sally goes to a community college 3/4 time.

Betty's "promise" to pay the rent collapsed. Although Betty pays some of Sally's expenses, Betty uses most of the child support to pay her own expenses. To cover the shortfall, Grandpa stepped up and pays Sally's tuition and Sally's rent. Grandpa does this by giving Sally highly-appreciated stock which Sally sells to cover her expenses. For 2014, Sally's long-term capital gain will be about $12000.

For tax purposes, can Sally declare herself independent so that the long-term capital gain is taxed at Sally's tax rate (which is zero percent).

If the KiddieTax does apply, who pays it? Betty can be quite belligerent. Grandpa does Sally's tax return, and Betty isn't going to cooperate with Grandpa at all. Grandpa's inclination is that Sally should just declare herself as independent and see if the IRS complains. =================== Here are my thoughts in order:

Although Betty threw Sally out of the house, she's still collecting child support for her. Therefore, dependency is still implied. Alternatively, there may be a fraud issue here for Betty.

I don't know what "3/4 time" means for college. Most places have a credit/semester (or quarter) threshold to separate part-time from full-time. Therefore, her student status is unresolved.

The apartment can still be while "temporarily away from home" even when in the same locality. It depends on what Betty did with Sally's room after tossing her out, i.e. can she return?

What Grandpa did was nice, but he might be providing 50%+ support, or there could be a multiple-support agreement issue. We don't know how much Betty paid for support.

Sally's LTCG is more than her personal exemption amount. If the student under age 24 rule does not apply, she cannot be claimed as a dependent. Otherwise, she is.

Therefore, I content that the information is insufficient to make a determination with regard to Sally being a dependent or not (and of whom).

Will the IRS complain? YES. I have seen it before, in the case of an acquaintance of a friend who got a letter from the IRS the year he turned 19 that he could not claim himself as a dependent. He lived in an affluent area where the children normally go to college. However, this letter recipient was NOT a full-time student that year. When I told him to ask the IRS who they thought should claim his exemption, the IRS backed off.

Reply to
D. Stussy

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