Kiddie Tax, Foreign Parenta

With the recent question of the kiddie tax, I recently had an inquiry from a student who comes under the kiddie tax.
The glitch is that his parents are Canadian, and have no US source
income. I told him that on Form 8615, line 6, he should report his parents as having zero income.
Did I get that right? Or did I miss something.
Thanks.
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Stu
http://DownToEarthLawyer.com
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A similar question came up recently in another forum. The other issue that was raised there is what to enter for the foreign parent's Social Security number if they have neither an SSN nor an ITIN, and have no need for one.
It appears that the IRS never considered the possibility of a U.S. citizen or resident alien subject to kiddie tax whose parents are foreign and have no connection with the U.S. tax system. There doesn't seem to be any guidance on how to handle it.
The conclusion in the other forum was to enter zero for the parent's income, as you recommended, and to write "NRA" in the space for the parent's Social Security number (like you would for an NRA spouse on an MFS return). I don't think it's possible to e-file the return without a parent's SSN on Form 8615, It has to be paper filed.
Bob Sandler
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On 2/22/17 7:03 PM, Bob Sandler wrote:

I think this is a bit more complicated because the kiddie tax does not work as has been assumed. Let us first assume that we have a child who is potentially (has unearned income in excess of the threshold) subject to the kiddie tax. First we must see if the child has a filing requirement. As the child is not a dependent of a US taxpayer, I believe the filing requirement is that of a single person under the age of 65 rather than the filing requirement for a dependent. Let us now assume that the taxable gross income exceeds the "single person" filing threshold. Let us also assume that after deducting the personal exemption and the standard deduction the child is left with taxable income of $2000. The Kiddie tax rule says that the child pays the greater of the tax using the normal tax rules or the tax he would pay after reducing his taxable income by the amount of the unearned income plus the allocable parental tax. In my example, the unearned income wipes out the $2000 of taxable income and only the allocable parental tax applies. Allocable parental tax is defined as the difference between what the parents would pay if the child's unearned income was added to the parents income over their actual tax. In this instance the actual parental tax is zero but the first part of the formula creates taxable US income for the NRA as it says you add the child's income (which is US source income) to the parent's taxable income. Technically, if you follow the rule, your NRA parents have US source income not effectively connected to a US trade or business (page 4 of the 1040NR). You would then use the tax treaty to see how each component of the income is taxed.
So, as you can see the parent's tax under the normal set of rules is zero but after you add the child's US income to an NRA tax return, you wind up with a tax liability that may or may not be higher than what the child would pay on his own return.
I have no idea as to whether this is what one is supposed to do when you have a child who is a US taxpayer without parents who are US taxpayers. I have never come up against this. Maybe you are not supposed to follow the code section that says you add the child's income to the parent's return and recalculate to come up with the allocable parental tax. Maybe, you are supposed to assume that you do add the child's income but you do not consider it to be US source income. If you do read the code section and apply it as written, the NRA parent's would have a tax liability that you would compare to the child's liability.
From my perspective, as the child is not a dependent and is filing his own US tax return as a single person using deductions and the personal exemption, I suppose you could just avoid the whole issue of the 8615 based on an assumption that Code section 1(g) is only applicable to US persons (child and parents).
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On Wednesday, February 22, 2017 at 6:52:33 PM UTC-5, Stuart O. Bronstein wrote:

Wouldn't the fact that she can't be claimed as a dependent by anyone get her off kiddie tax?
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No. Being able to be claimed as a dependent is not one of the considerations for whether Form 8615 is required. The 5 conditions that have to be met for Form 8615 to be required are listed under "When Form 8615 must be filed" at the following link. None of them says anything about whether the child can be claimed as a dependent.
https://www.irs.gov/publications/p929/ar02.html#en_US_2016_publink1000203825
Bob Sandler
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