kiddie tax sanity check

According to Pub 929, "you may pay up to $42.50 more tax" if you elect to file the child's investment income in excess of the kiddie tax amount on the parents' return. It goes on to explain why.

Assuming the child doesn't itemize, doesn't have private activity bond tax-exempt interest, is not blind, does not have an early-withdrawal-of-savings penalty, and so on for the unusual scenarios

-- is it ever worth more, tax-wise, than $42.50 to file the child's return separately?

Suppose the taxpayer has more than one child subject to the kiddie tax rules (which changed radically, age-wise, in the last two tax years). Suppose the taxpayer is subject to AMT. Does the answer change? Was it ever significantly different in the last few decades?

Side issues, such as some states not conforming to the recent federal changes on age limits for kiddie tax, are also interesting topics to comment on.

-Mark Bole

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Mark Bole
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Except that that publication is lying when it says that.

It's true that *directly* there's only $42.50 more tax, but if you include the child's investment income on the parents' return, that increases the parents' AGI, and so will reduce allowable medical deductions, will reduce allowable miscellaneous deductions, could increase taxable SS benefits, could cause phaseouts of AGI-dependent credits, etc.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Rich Carreiro

Somehow I recollect that in years past (last decade) the difference might have been more dramatic -- does anyone know if the calculations on the form 8814 were revised at some point?

With one specific return I worked on, parents (AMT and various limitations) and two children, I ran three scenarios and it turned out that one child on his own and the other on the parents return actually resulted in about $55 tax savings compared to both on the parent's return. Both children on their own did *not* yield the expected $85 savings. I didn't work through every calculation, but I suspect it has something to do with the kids' ratio of cap. gains/qual. dividend income vs. ordinary interest/dividend income.

In California the federal AGI determines the state exemption credit limitation, so it definitely yielded a better state result when the child's income was not included in the federal return.

In the end the decision to make the parent's election on form 8615 should probably be based on who does the return -- a professional will most likely charge more to do separate returns than the savings, especially given what a PITA Form 8615 is. If self-preparing using tax software, an extra hour on a Sunday afternoon is probably worth the savings.

-Mark Bole

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Mark Bole

[...]

Oops... s/b Form 8814.

-Mark Bole

Reply to
Mark Bole

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