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TCP CPA Practice Questions: Calculating Kiddie Tax
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May 15, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching how to calculate kiddie tax. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-calculating-the-kiddie-tax/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:46 Question 1: Calculating the Total Tax for a Child with Earned and Unearned Income 04:51 Question 2: Calculating the Total Tax for a Child with Only Unearned Income 07:53 Question 3: What Income is Subject to the Kiddie Tax? 10:18 Question 4: Calculating the Total Tax for a Child with Earned and Unearned Income Continued 12:41 Question 5: Calculating the Amount to be Taxed at the Parent's Rate 14:24 Pillar Topics
View Video Transcript
0:00
Welcome to another TCP walkthrough video. I'm Logan and in today's video
0:04
We're learning all about calculating the kitty tax and we're going to be doing that the super fast CPA way
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Which is diving straight into questions to learn the material if you don't know much about our strategies
0:14
Make sure you go check out our free one-hour webinar training on superfastcpa.com
0:18
We go over the key ingredients to passing the CPA exam again. It's only one hour long
0:23
It's free and it will save you so much time struggling with your process
0:26
Make sure you go check it out. The link will be in the description Also one more thing about this video this video will only have five questions that we go over
0:34
But members will have access to the full 10 question video when we post it to the forum
0:39
So if you like this, you can get more of it If you become a super fast CPA member with that said let's dive straight into the questions
0:46
All right Here is question 1 Jamie a 17 year old dependent earned
0:51
$4,000 working at a local bookstore during the summer and Received $3,000 in interest from a trust fund during the tax year
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Assuming the standard deduction for a dependent is the individual's earned income plus
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$350 not to exceed $13,000 calculate Jamie's tax liability under the kitty tax
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The threshold for applying the parents tax rate is set at two thousand four hundred dollars for net unearned income
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Jamie's parents have a marginal tax rate of 33% assume Jamie's own tax rate is 10
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Alright, there's a lot of numbers in there and if you don't really know how the key tax works, that's okay
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That's what we're here for So let's go ahead and go straight into the answer to start learning how this calculation works and what the different things in the question
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Mean, okay, and the answer was four hundred and three dollars So again, let's learn how this works to calculate the kitty tax for a dependent child
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Start by summing the child's earned and unearned income Subtract their standard deduction
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Calculated as earned income plus an additional amount which in this example was three hundred and fifty dollars
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Capped at a maximum value and again, that was thirteen thousand dollars here to determine taxable income
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Then from the unearned income subtract a specified threshold to find the net unearned income
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Which is taxed at the parents higher rate if it exceeds this threshold The remaining taxable income is then taxed at the child's lower rate add these taxes together to establish the total tax liability
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This method ensures children are taxed fairly while preventing parents from exploiting lower tax rates Okay
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even that part of the explanation is still a little bit confusing because It's talking about a whole bunch of things that we still don't really understand or know what they are
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So let's go through the calculation step by step and I'll try to explain it a little bit more
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so first you need to find out what the standard deduction is in this case and
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The standard deduction for a child who has unearned income and earned income and that is important
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we'll talk about that later is The earned income plus a certain amount and you know, that might be four hundred dollars
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That might be the three hundred and fifty dollars mentioned in this question that will change with time
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But based off your review course and you're studying you will know what that number is
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So you take the earned income plus that number in this case? It was three hundred and fifty dollars and that is your standard deduction
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So then you take the total earned income and the unearned income and add them together
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That's the total income of the child and then you need to figure out what the taxable income is
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so you take this total income and subtract the standard deduction that we figured out and that gives you the taxable income of
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$2,650 now we'll leave that there for a second we go over here to the net unearned income and we calculate that by taking the
3:30
unearned income right here and Subtracting the threshold that was given now this threshold again same as this number up here
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Will change with time so I'm not gonna give you like the specific number for this year because I don't know what it is
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So you'll know that from your review course or from just looking it up
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But you take the current year threshold and again, that was this right here this
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$2,400 and you subtract that from the unearned income and that gives you the amount of income that will be taxed at the parents rate and
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That is the kiddie tax right there that the kiddie tax is whatever was taxed at the parents rate and that gives you
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$198 now we go back and we take this taxable income. Remember we left it up here
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You subtract however much money was taxed at the parents rate So this $600 right here, right and that gives you
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$2,050 the remainder and this remaining amount is what is taxed at the child's rate and then you add those two taxes together
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And that gives you the total tax But remember the kiddie tax is specifically the amount of income that is taxed at the parents rate now
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That's a pretty involved calculation and we'll get a lot more practice as we do some more questions
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But that's the beginning of our learning for this. So let's go ahead and go to the next question to learn some more
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Okay, here's question 2 Lila a 14 year old dependent received $3,000 in dividends from stocks during the tax year
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Assuming the standard deduction for a dependent child with no earned income is
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$1,100 and the threshold for applying the parents tax rate under the kiddie tax rules is
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$2,200 for net unearned income Calculate Lila's tax liability if her parents marginal tax rate is 24
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Assume Lila's own tax rate is 10% Okay, so this is similar to what we just did but this child only has unearned income
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They don't have earned income so that changes things a little bit
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However, it did give us the standard deduction to use so you could probably if you paid attention to the first question
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Do this question if you want to try that that's great Go ahead and pause the video and come back when you're ready
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If not, let's go ahead and look at the answer to see just it's a little bit different when they only have unearned income
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Instead of both earned and unearned income. So let's look at this. Okay, so the answer was $302
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So we start with the unearned income we take the standard deduction which in this case was $1,100
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So notice that the standard deduction here was not the earned income plus a number because there was no earned income
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So there's just a normal standard deduction And again, you will know this from your review course or even just from looking it up
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This isn't necessarily the current standard deduction for children, but you will know it
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So we take this standard deduction subtract it from the unearned income giving us the taxable income of
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$1,900 and then you go back and take the unearned income less the threshold that was given and again
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You'll know this from what I've seen It always seems to be double what the standard deduction is, but I'm not sure if that will always be the case
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So don't make that mistake make sure you know what the actual
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Threshold is and don't just assume that it is the standard deduction Multiplied by two even though a lot of times it seems to be the case like that
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So you take the threshold out of the unearned income and that gives you the net unearned income and that is the amount that will
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Be taxed at the parents rate again giving you the kiddie tax and then you go take
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This taxable income that we left there for a little bit Subtract the amount that was taxed at the parents rate and that gives you
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$1,100 and that is the remaining amount that will be taxed at the child's rate and then adding those two together gives you the total
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Tax liability so a very similar structure you figure out what the standard deduction is
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Subtract it from the unearned income or the total income then What then leave that there go take the threshold that was given or that you know out of the unearned income
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And that will give you the amount that will be taxed at the parents tax rate and that gives you the kiddie tax
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That's the most important thing But then if you want to figure out the rest of the tax You take the taxable income less what was taxed at the parents rate and
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That gives you the amount that will be taxed at the child's rate and then of course adding those two taxes together gives you the
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Full tax so we've learned pretty much how to do it in just two questions, but we're gonna get some more practice
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So let's go ahead and go to the next question All right Here is question three Anna a 20 year old full-time university student earned
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$3,000 during a summer internship and received $5,500 in dividends from a trust fund established by her grandparents
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Anna's parents covered all her living expenses and university tuition totaling $30,000 annually
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I wish that I had had that given that the standard deduction for a dependent student is the individuals earned income plus $300 not exceeding
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$12,950 and the threshold for the parents tax rate under the kiddie tax is $2,300 calculate Anna's tax liability if her parents marginal tax rate is 30% assume Anna's own tax rate is 15% now before we look
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at the Possible solutions. I just want to let you know a lot of the questions on the exam may not be giving you this information
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You know, they may not be telling you the individuals earned income plus $300 or they may not tell you what the threshold is
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For that current year because they may assume that you should know that from your studying
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So it may not look exactly like this when you're doing your test
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So just make sure that you do know these numbers what the threshold is
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What the number is that you add to the earned income to get the standard deduction
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So just make sure you know those things they're given here because where you we're trying to teach a concept
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So we're not using the actual numbers necessarily We're just using whatever numbers were given to then apply the concept in whatever situation we're given
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so with that said Pause the video see if you can figure out which is the correct answer based on what we've learned so far and then when you're
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Ready come back. We'll look at the answer Okay, and the answer was that only Anna's dividends will be subject to the kiddie tax that makes sense
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If you think about this earned income plus a number being what the standard deduction is
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Basically, it's taking all the earned income and a little bit more out of the equation for taxes
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so let's just read a little bit more about this the kiddie tax applies to children under the age of 18 and
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to full-time students under the age of 24 if the parents provide more than half of their support and again the keyword there is
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Under so an 18 year old would not qualify for the kiddie tax unless they were a full-time student who was you know
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Obviously under age 24, so it's under that is the keyword there and then earned income is not subject to the kiddie tax
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Only the unearned income portion can be taxed under the kiddie tax rules at the parents tax rate
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All right, so we've learned pretty much everything we need to know for the kiddie tax
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So let's do a couple more practice questions just to hit it home for you Okay, here is question 4 Sarah a 17 year old dependent earned
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$6,000 during a summer internship and received $4,000 in interest income from bonds gifted by her uncle
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Sarah's parents covered most of her expenses including school fees and living costs
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Assuming the standard deduction for a dependent child is the individuals earned income plus $350 not exceeding
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12,950 and just letting you know that's trying to say that it can't exceed the current year
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Standard deduction for like an individual if you notice This is pretty close to what the standard deduction would be for an individual in the current year
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So that's what this number is By the way, just in case you've been wondering that and the threshold for applying the parents tax rate under the kiddie tax is $2,200
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Calculate Sarah's tax liability if her parents marginal tax rate is 25% assume Sarah's own tax rate is 12
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Okay, so we've learned how to do this It's a little bit of a complicated equation But if you've been paying attention, you probably know how to do this at this point
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So go ahead pause the video and when you're ready come back. We'll look at the answer together. Okay, here is the answer
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$672 so this is a paragraph so it might be a little bit harder to follow but let's read through it
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Calculate the standard deduction by adding Sarah's earned income of $6,000 to $350
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resulting in a total of $6,350 so that's the standard deduction Then we determine Sarah's total income by summing her earned income of $6,000 and her unearned income of $4,000
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Giving a total of $10,000 and then from there we subtract the standard deduction
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Giving us a taxable income of $3,650 Now we leave that $3,650 there for a second
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And now we're going to calculate the net unearned income by deducting the threshold which in this case was $2,200
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From her total unearned income which was $4,000 and that leaves you
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$1,800 as the net unearned income this net unearned income is what will be taxed at the parents tax rate and that's the kiddie tax
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So that gives you at a 25% tax rate $450 and then you find the remaining taxable income by subtracting the net unearned income
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from the total taxable income that we left up above here giving you the
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$1,850 and then that amount is taxed at her rate, which was 12% yielding $222 of tax
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So you add those together and get $672 of tax. Okay, we've learned a lot. Let's go ahead and go to the next question
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Okay, here's question 5 Emily a 15 year old dependent received $5,000 in dividends from an investment account established by her grandparents
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Emily's parents provide her with complete financial support Assume the standard deduction for a dependent with only unearned income is
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$1,100 and the threshold for applying the parents tax rate under the kiddie tax is
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$2,200 calculate how much of Emily's unearned income is subject to the kiddie tax if her parents marginal tax rate is 28
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Okay, we're five questions in we've learned a lot. I think you could do this pay attention to what it says here though
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This last sentence and when you're ready come back and we will look at the answer together
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Okay, so here is the answer be $2,800 so again, that's why I wanted you to make sure you paid attention because it's asking how much of the unearned income is subject to
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The kiddie tax it's not asking what the kiddie tax was. It's asking how much income was subject to the kiddie tax
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So $2,800, so we take the unearned income of $5,000 and because she didn't have any earned income
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We don't do that other standard deduction. That's the earned income plus a number
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We just take the normal standard deduction for a child with unearned income
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which in this case was $1,100 and then you subtract that from the unearned income that gives you the taxable income and
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You subtract from the unearned income the threshold and that amount is taxed at the parents tax rate
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And then obviously if we went further We would then take this amount and subtract it from the taxable income and that would give us the amount that was taxed at the
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Child's tax rate, but this question was only asking how much is taxed at the parents rate and that is this $2,800
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Okay, we learned a ton from just five questions before we go any further Let's do one more part of the process called pillar topics
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now the idea behind pillar topics in the super fast CPA strategy is
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After you go through the questions or even as you're going through the questions to learn the material you will notice
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Topics and things that keep popping up and that are obviously important
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These are the things like kind of like the equations in that we've gone over in this that keep coming up
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These are obviously the things that you need to know for the exam according to your review course
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So you take a second and write them down so that you know them So let's go ahead and look at the pillar topics for this video. Okay, here are the pillar topics
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So first off the kiddie tax is essentially there to prevent parents from moving income to their children to avoid taxes
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That's pretty much why it's there and now let's go over the two different scenarios
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So if a child has only unearned income you subtract the current year standard deduction and again, that's a specific number
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for children without earned income from the unearned income of the child giving you the taxable income
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Then you leave that there for a second and you subtract the limit from the unearned income
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Something like twenty five hundred dollars Remember that threshold and that gives you the net unearned income and that net unearned income is what will be taxed at the parents
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rate and that gives you the kiddie tax and then you go back to the taxable income and subtract the net unearned income from the taxable income and
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That amount if there's any left is taxed at the child's tax rate and adding those two together will give you the total tax
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But that's how it works for a child with only unearned income. Now, let's talk about a child with earned and unearned income
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It's very similar. The most important part is the standard deduction. That's the difference
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The standard deduction is now the earned income plus a certain amount something like three hundred fifty dollars four hundred dollars
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Something like that you subtract that from the total earned and unearned income
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That gives you the child's taxable income and then from there. It's the exact same you
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Still subtract the threshold from the unearned income and that gives you the net unearned income and that's taxed at the parents tax rate
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And then you take the total taxable income and subtract the net unearned income and that gives you
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The amount that will be taxed at the child's rate. So that's how you do it the biggest difference between the two situations
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You know a child only has unearned income or a child that has earned and unearned income
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The biggest difference is the standard deduction. Alright, those are the pillar topics for this video just a reminder
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We only went through five questions in this video But members of superfast CPA will have access to the full 10 question video when we post it in the members forum
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So if you liked this, you can get more of it if you become a superfast CPA member
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Also, make sure you go check out the free training webinar. We have on superfast CPA comm again
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It's free and we teach you the key ingredients to passing the CPA exam
17:08
Make sure you go watch that again. The link is in the description if you liked this
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Make sure to LIKE the video and leave a comment. I hope this was helpful and I will see you in the next video
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You
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