Tragedy causes young child to get 1099r

[Possi]

New client is raising her niece. Client's sister was murdered by her husband who committed suicide, all with the then 4-yr-old at home.

They were both military.

The child now receives income from the military which will last I don't know how long. It's about $20k annually, with a 1099R for reporting.

The child is now 7, and I need to do 2016 and 2017 returns.

Do I need to know anything special for this? Aunt has all the paperwork to claim the child, and will sign for the child. Aunt claims the child on her tax return, and the 8615 kiddie tax of course is played.

[Richcpaman]

Tell your client to get that child the Social Security Survivor Benefit as well.

Aunt may not be able to claim the child, as she is NOT providing more than half of her support.  $20K?  Is Aunt paying $20,001 for her care?

Rich

 

[Gail in Virginia]

Aunt may be providing over half of support if they live in Aunt's house and Aunt provides food.  Child's money may be going partially into savings account which does not count towards support.  But you should actually run some numbers to be sure Aunt can claim child as dependent. 

[RitaB]

Aunt can claim niece if niece did not provide more than 1/2 her own support.  Aunt technically doesn't have to provide more than 1/2.  Donna, you mentioned Kiddie Tax.  Niece also has investments?  So, is aunt is socking away at least some of the $20,000 in investments owned by the niece? 

[Hunter L]

The p

3 hours ago, Possi said:

New client is raising her niece. Client's sister was murdered by her husband who committed suicide, all with the then 4-yr-old at home.

They were both military.

The child now receives income from the military which will last I don't know how long. It's about $20k annually, with a 1099R for reporting.

The child is now 7, and I need to do 2016 and 2017 returns.

Do I need to know anything special for this? Aunt has all the paperwork to claim the child, and will sign for the child. Aunt claims the child on her tax return, and the 8615 kiddie tax of course is played.

Double check... One of the filing requirements is  "At least one of the parents have to be alive at the end of 2017."

Also, Rita, distributions on a 1099-R count as "unearned" income for the Kiddie tax.

[RitaB]

27 minutes ago, Hunter L said:

The p

Double check... One of the filing requirements is  "At least one of the parents have to be alive at the end of 2017."

Also, Rita, distributions on a 1099-R count as "unearned" income for the Kiddie tax.

Ah, so Kiddie Tax return is not done in this case, and niece may NOT have investments.  Thank you.  Nice catches.

[Hunter L]

YW...  I just did one a few days ago for a little girl with pension on a 1099R... this can be a very unfair tax.

 

[Possi]

HMMMMM.....

Aunt isn't treated as a living parent? I thought she was since she has legal custody. I need to re-think this if so.

Aunt is providing over half the support, and is saving much of the money. Not sure how much, but there's plenty of interest income derived from the savings account.

 

[Possi]

2 minutes ago, Hunter L said:

YW...  I just did one a few days ago for a little girl with pension on a 1099R... this can be a very unfair tax.

 

The tax is hitting them real hard, yes.

I do need to get the Aunt to check on SSI for her, too.

[Hunter L]

That is how I interpret it.... 

"4. At least one of the child's parents was alive at the end of 2017."

"These rules don’t apply if neither of the child’s parents were living at the end of the year."

 

As long as they did not adopt her.  I did some reading on this, the intent of the rule was to avoid wealthy pushing tax to the kids rate, maybe the IRS had a heart and figured if both parents are deceased that is not the motive..

 

 

[Possi]

11 minutes ago, RitaB said:

Ah, so Kiddie Tax return is not done in this case, and niece may NOT have investments.  Thank you.  Nice catches.

The interest on savings from the 1099R income was $480 in 2017, the first full year of income. So, there must be a good amount going into savings. Aunt's income is about $55k. She has one other child of her own. Since the income is on a 1099R, it is unearned and that's why I was doing the kiddie tax.

Does that help?

[Possi]

1 minute ago, Hunter L said:

That is how I interpret it.... 

"4. At least one of the child's parents was alive at the end of 2017."

"These rules don’t apply if neither of the child’s parents were living at the end of the year."

 

As long as they did not adopt her

 

Well, Aunt didn't *have to adopt her. She was awarded her niece in court, and I have a copy of the papers.

[Roberts]

I'm assuming this is the Survivor Benefit Plan? If so the kid gets the benefit until turning 22 unless she gets married or quits school and then it stops.

For the savings account, I hope they get the funds into a minor trust account.

[Richcpaman]

1 hour ago, Roberts said:

I'm assuming this is the Survivor Benefit Plan? If so the kid gets the benefit until turning 22 unless she gets married or quits school and then it stops.

For the savings account, I hope they get the funds into a minor trust account.

I would recommend a Code Section 529 plan for her. 

 

[SaraEA]

Thanks for educating me everyone--I had not realized that 1099R income was considered unearned for kiddie tax purposes.  Just wait until 2018 when the kiddie tax as we know it goes away and the child is taxed at the highest rate on unearned income above $12,500.  Be sure to set up estimated payments.

[Roberts]

17 hours ago, Richcpaman said:

I would recommend a Code Section 529 plan for her. 

 

That actually works also and gets tax deferred (or free) growth. The problem is the kid has to own it since it's their money to begin with so it doesn't eliminate the risk that the child would blow it all when they are 16. With a minor trust, the trustee would have to agree to any withdrawals until turning a set age. This kid could easily have $200k in their fund when they turn 16, not a lot of teenagers could avoid the temptation.