CFP® Practice Question of the Week: Must Know Tax Rules, Kiddie Tax

Your client Beauregard has a daughter named Constance, age 16. Constance qualifies as a dependent on Beauregard’s income tax return. She has a passion for broadcasting and earned $3,000 as a part-time announcer in a local radio station this year. Beauregard transferred $100,000 into a high yield bond fund for Constance last year. The bond fund paid Constance $6,000 in interest income this year. Which of the following is correct with respect to her current year income taxes?

$9,000 will be taxed at Beauregard’s marginal tax rate.
$7,000 will be taxed at Beauregard’s marginal tax rate.
$6,000 will be taxed at Beauregard’s marginal tax rate.
$4,000 will be taxed at Beauregard’s marginal tax rate.
None of the above is correct.

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The correct answer is D: Unearned income of a dependent child under 19 (24 if a full time student) in excess of $2,000 is taxed at the parent’s marginal income tax rate.

Choices A, B, and C are incorrect. Only Constance’ unearned income in excess of $2,000 will be taxed at Beauregard’s marginal tax rate.

Exam taking hint: The $1,000 standard deduction for a dependent claimed on another’s income tax return is provided by the CFP Board as part of the Income Tax Tables. Remember to merely double that amount and you have the Kiddie tax threshold of $2,000!

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