Child's Kiddie Tax (Form 8615) carryover to state taxes?

[Michael16]

I am the trustee of a First Party Special Needs Trust for my child. Income from the grantor trust gets passed to my child at our rate (aka the kiddie tax) as my child is claimed as a dependent on our taxes (income is well into the 5 figures so well above $2700). 

I filed the trust taxes (Form 1041) and I'm working on my child's now (Form 1040).

I was able to manually add form 8615 for the Kiddie Tax, which gives me the correct tax due on my child's federal taxes.

However, I notice the state taxes are using the federal itemized deduction to calculate taxes due. (my child's medical expenses all them to itemize at the federal level, but it is overridden by form 8615). How does form 8615 affect state tax due, if at all? Is TurboTax computing this correctly?

[DaveF1006 · Accepted solution]

It depends. Since the trust is a Grantor Trust, the IRS treats the trust’s income as if it belongs to your child (the beneficiary).

Here is a breakdown of how Form 8615 interacts with state taxes and whether TurboTax is likely steering you correctly or taking you for a ride far away from home.

1. Does Form 8615 Affect State Tax?

1. In the vast majority of states, no. Federal Form 8615 is a calculation tool used to determine the tax rate applied to federal taxable income; it does not change the child’s Adjusted Gross Income (AGI). 
2. Federal Level: Form 8615 essentially says, "We will look at the child's income, but we will use the parent's tax brackets to calculate the bill." 
3. State Level: Most states calculate tax based on the child's own income using the state's brackets and rates. Most states do not have their own version of the Kiddie Tax. Therefore, the "parents' rate" override on the federal return usually vanishes when you move to the state return.
4. However, if you live in the states of California, New York, or Georgia, there are specific state statues that deal with Kiddie Tax specifically.

2. The "Itemized Deduction" Conflict

You mentioned that the child’s medical expenses allow them to itemize at the federal level, but Form 8615 "overrides" this. To be precise:

1. Form 8615 doesn't eliminate itemized deductions; it just changes the tax math. 
2. However, if the child's itemized deductions (like medical expenses) are significantly higher than the standard deduction, they should still be subtracted from the total income to reach Taxable Income.
3.  Most states "piggyback" off the federal return. If you itemize on the federal return, TurboTax will typically default to itemizing on the state return. Because the state is likely not applying the Kiddie Tax (parent's rate), it simply sees: [Child's Income] - [Itemized Deductions] = [State Taxable Income]. This is then taxed at the child's (likely very low) state bracket.

Now you are wondering if TurboTax is handling this correctly.  It sounds like TurboTax is performing a "Standard vs. Itemized" comparison for both levels:

1. Federal: It sees that while the child has high medical expenses, the tax is ultimately dictated by your rate via Form 8615. 
2. State: It sees the child has enough medical expenses to exceed the state’s standard deduction. It is pulling those federal itemized numbers to lower the child's state taxable income.

I mentioned earlier that California and New York treat kiddie tax reporting differently. California does tax "kiddie tax" at the parents' tax rate. if you live in California, itemizing deductions benefits you because it will lower your taxable income if the itemized deductions exceed the standard deduction.  TurboTax will determine which is the best deduction for you if you live in the state of California.

New York uses its own progressive tax system, which is usually less than Californias tax. Itemizing here will also benefit you.

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[Michael16]

Super helpful, thanks.

You mentioned Georgia having a state statute that deals with the Kiddie Tax. I am filing this return in Georgia. Are there any additional details that you can provide on this?

[DawnC]

There is no separate Georgia kiddie tax treatment, and no special Georgia adjustment just because you reported the child’s unearned income on your federal return.  Georgia just starts from federal AGI and then applies the normal Georgia adjustments, if any.   TurboTax will handle the transfer to your GA return automatically.