Olaf and Olga have a child, Hans (age 10). In 2012, Hans received $3,000 of interest income and paid investment related fees of $200. Olaf and Olga had $70,000 of taxable income, not including their child’s investment income. The parents have no qualified dividends or capital gains. Olaf and Olga do not make the parental election.
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1 |
Determine Hans’s net unearned income |
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Gross income (unearned) |
$3,000 |
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Less: $950 |
(950) |
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Less: The greater of |
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• $950 or |
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• Investment expense ($200) |
(950) |
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Equals: Net unearned income |
$1,100 |
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2 |
Determine allocable parental tax |
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Parents’ taxable income |
$70,000 |
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Plus: Hans’s net unearned income |
1,100 |
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Equals: Revised taxable income |
$71,100 |
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Tax on revised taxable income |
$9,835 |
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Less: Tax on parents’ taxable income |
(9,630) |
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Allocable parental tax |
$205 |
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3 |
Determine Hans’s nonparental tax |
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Hans’s AGI |
$3,000 |
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Less: Standard deduction |
(950) |
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Less: Personal exemption |
(–0–) |
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Equals: Taxable income |
$2,050 |
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Less: Net unearned income |
(1,100) |
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Nonparental taxable income |
$950 |
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Equals: Tax ($950 × 10% rate) |
$95 |
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4 |
Determine Hans’s total tax liability |
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Nonparental source tax (step 3) |
$95 |
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Allocable parental tax (step 2) |
205 |
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Total tax |
$300 |