He has a taxable income of 35,000, $20,000 of it from ordinary dividends. His tax before Kiddy tax is $500. After Kiddy Tax it is $5,000.
My taxable income is $78,000, virtually all of it from ordinary dividends, so my tax is $800.
Could it be right that his tax goes from $500 to $5,000?!
When I said ordinary, I meant qualified. Sorry...
As a test I added $30,000 in dividends ($20,000 of qualified) to my return and found it increased by federal tax by $6,000. If I understand it correctly, the kiddie tax is supposed to effectively combine the returns, so this confirms the $5,000 of kiddie tax is correct. Right?
Yep, your tax might be low because of deductions such as mortgage interest, property tax, charitable contributions, state income tax, etc. However, your marginal tax rate might be higher, meaning the next dollar of income is taxed at the full marginal tax rate, which sounds like 25% for you.
Yep, 25% of $20000 is $5000.
Then it should be 15% of $20000 or $3000.
Yes, basically the tax rate is the same as if you earned the income. The kid does get a little tax break -- the first $1000 is tax-free and the next $1000 is taxed at 10%. The rest is taxed at the parent's rate, which I assume will be 15% here.
virtually all of it from "qualified" dividends, so my tax is $800.
yikes - how do you do that :) that's like 1% in taxes ?
line 43 = $78,000 line 44 = $800
My guess is, this is the same story as another poster in this group some months ago... when he states "my" taxable income, he actually means "our" taxable income, as in a MFJ return.
Cap gains income of $78K on a MFJ return with no other income is mostly taxed at zero percent, and yields the numbers above (tax = $825).
Oops, meant $98K gross income give the results above.
To the original question, yes it sounds quite reasonable to me. The whole point of kiddie tax is to prevent the parents putting income-earning assets in the child's name just to lower taxes. Since the parents' MFJ return has already "sopped up" all the zero-tax gains, the child's income is now taxed at more "normal" rates.
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