Kiddie Tax

[Denne]

I have been searching for information on reducing the Kiddie Tax for a client.  They have asked me why they can't just let the child claim himself to avoid much of the tax.  The child is 8 and of course not independent.  It would seem that there is something I can print off for them to either show that the child can or can not claim himself.   The child's investment income came about, in part, because of trying to move it to a different account and ended up being investments sold to do so... Nice income of nearly $13,000 and parents income is nearly $200,000 this year and in a much higher tax bracket than the child would be if claiming himself.   Ideas or advise....my first return with Kiddie Tax this high and know he has to file his own return, but struggling with it for sure.  Thanks for your assistance. 

[Lion EA]

First of all, the kid does get $1,000 of investment income not taxed and the next $1,000 taxed at his own rate; so the parents' rate/Kiddie Tax doesn't kick in until over $2,000.  Second, Kiddie Tax applies unless the child provided more than half of his or her support with earned income and is 18.  (TTB 12-1, 9-11)  Look in the instructions for Form 8615, IRS Pub. 929, IRC section 1(g).  I guess both the parents could die to eliminate Kiddie Tax, but that seems a little drastic.

[jklcpa]

No, child can't claim himself unless he is actually entitled to do so.  If the parents are entitled to claim the dependent exemption for the child, the child cannot claim himself even if the parents don't.  Below are 3 things you could print to show the client, take your pick.

 

From pub 501:

Dependent cannot claim a personal exemption.    If you are entitled to claim an exemption for a dependent (such as your child), that dependent cannot claim a personal exemption on his or her own tax return.

 

Below is an excerpt from the CCH Master Tax Guide, the 2012 book used for 2011 returns, but this rule wouldn't have changed, only the amount allowed for the exemption has increased.   

135.  Personal Exemptions. Generally, an individual may claim a personal exemp­ tion deduction for himself or herself equal to the exemption amount for the year ($3,700 for 2011; $3,800 for 2012) c,-r 133) on their  tax return, plus any exemptions  for depen­ dents   (,-r 137)  (Code  Sec.  151(b);  Reg.  § 1.151-1; Rev. Proc.  2011-12; Rev.  Proc. 2011-52).28 However, no exemption will be allowed to an individual who is eligible to be claimed as a dependent on another  taxpayer's return. Thus, students who work part-time during the year or for the summer  may not claim a personal exemption  on their  own return if their parents, or any other taxpayers, are entitled to claim them on their return. If dependent-S- who are  not  allowed  their  own exemptions have gross  income  in an amount not exceeding $950, they  will not be taxed on that amount and need  not  file income tax returns  (,-r 101)

If you want the actual IRC, it is 151(d)(2) -

26 U.S. Code § 151 - Allowance of deductions for personal exemptions

(d) Exemption amount

For purposes of this section

(1) In general

Except as otherwise provided in this subsection, the term “exemption amount” means $2,000.

(2) Exemption amount disallowed in case of certain dependents

In the case of an individual with respect to whom a deduction under this section is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the exemption amount applicable to such individual for such individual’s taxable year shall be zero.

Edited April 30, 2015 by jklcpa
added text from guide instead of pdf attachment

[Denne]

Thank you so much Judy.  I knew it had to be there some place!   I have printed and will show them the reason why they can not try to avoid the additional taxes.  This is my first experience with a child making enough to need to file on their own.  I think I did so much reading that I finally couldn't even think the issue through.  So wonderful to have your assistance.....thank you!!