Dependent unearned income and high federal owed

[CI Guy]

My dependent son has a taxable unearned income of $4830 and TT says he owes over $1,000 in federal taxes. Does this sound right? Is this because of the kiddie tax? Seems harsh for such small amount of income.  

[Vanessa A]

It is possible, depending on your tax bracket.  If you are in the higher tax bracket, and depending on what other income he has, then his unearned income would be taxed at your rate for the amount over $2,600.  

The first $1,300 would be untaxed and the next $1,300 would be taxed at your child rate.  

If you are not in a higher bracket, it is best to go back and double check your entries to make sure there is not a typo or duplicate entries.

What is the Kiddie Tax?

 

[Hal_Al]

Q. My dependent son has a taxable unearned income of $4830 and TT says he owes over $1,000 in federal taxes. Does this sound right?

A. Yes.  That appears to be 37% tax rate, the highest federal bracket.

Q. Is this because of the kiddie tax?

A. Yes. Everything over $2600 is taxed at the parents marginal rate. 

[CI Guy]

My calculation shows about 23%, so sounds like it is my tax rate. 

[ThomasM125]

Your effective tax rate will be a blend of rates applied to your income that falls within different ranges. The ranges are taxed at 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on how high your taxable income goes.  So, the 23% that you mention would likely mean that some of your income is taxed at 10%, some at 12%, some at 24%, and some at 32% or more. In addition, you may be subject to an investment tax of 3.8% on your net investment income. The portion of your child's tax taxed at your highest marginal rate could very well be over 23%, given that your blended rate will typically be less than your marginal rate.