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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?

  1.  $9,000 will be taxed at Beauregard’s marginal tax rate.
  2.  $7,000 will be taxed at Beauregard’s marginal tax rate.
  3.  $6,000 will be taxed at Beauregard’s marginal tax rate.
  4.  $4,000 will be taxed at Beauregard’s marginal tax rate.
  5.  None of the above is correct.