Kiddie Tax and Inherited IRA

Forum|Forum|11 months ago
July 26, 2025
4 replies
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My 22 year old grandson was a full time student until graduation in May of this year. His parents paid his tuition and living expenses until graduation, but will NOT claim him as a dependent. He got a full time job in June and pays more than 50% of his expenses from that point forward. He has a $30,000 inherited IRA from his grandmother. Since his income will be lowest this year (i.e a half years salary) he planned to withdraw the full $30,000 (unearned income) and move it into a regular savings account hoping or expecting he would only be subject to his own marginal tax rate. Is this correct or would the "kiddie" tax apply in this situation? Note: his grandmother was not taking RMD's before she passed away.

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Bsch4477

Level 15

If he had earned income that provided more than half of his support he would not be subjected to Kiddie tax.

NCperson

Level 15

@bgoodreau01 "kiddie tax" could only occur if the child COULD BE a dependent of the parents. And from what you state, that could still be possible.

Be mindful that the measurement is that the student provides more than 50% of his own expenses FOR THE YEAR. The fact they he provided more than 50% from the point he was employed forward is immaterial and NOT the right way to look at this. I think there is more work to do to determine whether your grandson COULD BE a dependent of his parents in 2025.

if your grandson is determined not to be a dependent, then he would be subject to the tax rate when adding his income plus the $30,000 - that could still kick him into a higher tax bracket. He would have to do the math to determine. .

rjs

Level 15

@bgoodreau01 @NCperson

Whether the child CAN BE claimed or IS claimed as a dependent has nothing to do with whether he is subject to kiddie tax. Here are the conditions for kiddie tax to apply. Note that these rules do not mention whether or not the child is a dependent.

The child has unearned income of more than $2,700 (for 2025).
The child is required to file a tax return.
The child is not filing a joint tax return.
At least one of the child's parents was alive at the end of 2025.
Any one of the following three conditions is true.

(1) The child was under 18 at the end of 2025.

(2) The child was 18 at the end of 2025 and his earned income (from working) is not more than half of his total support for the year.

(3) The child was under 24 at the end of 2025, he was a full-time student, and his earned income (from working) is not more than half of his total support for the year.

For more details see the IRS Instructions for Form 8615. Note that, after listing the conditions as stated above, the instructions say "These rules apply whether or not the child is a dependent."

UPDATE 7/27/25: Corrected link to IRS Instructions for Form 8615.

bgoodreau01Author

Level 2

Thank you for your responses. The "conditions" listed above appear to be from IRS Pub 553 which explains when IRS Form 8615 needs to be completed. The last point says" (3) The child was under 24 at the end of 2025, he was a full-time student, and his earned income (from working) is not more than half of his total support for the year."

Since my grandson will have "earned income" more than half his expenses for the year, but did NOT PAY half his expenses (mostly due to tuition, etc his parents paid until graduation in May), does that mean he need not complete Form 8615 and therefor he is not subject to the kiddie tax?

In other words, he need not have "paid" for half his expenses, he need only have "earned" more than half his expenses.

I may be grasping here but just trying to read the exact rules literally. My guess is that's what the IRS would do. i.e having "earned" does not mean having "paid".

rjs

Level 15

@bgoodreau01

You are looking at a very old publication. Pub. 553 was last published in 2009 for 2008 tax returns. If you want to "read the exact rules literally" you should read the current rules, not the rules from 16 years ago.

The current rules for Form 8615 are in the IRS Instructions for Form 8615, which I referred you to a few days ago, in an earlier reply above. The "exact rules" don't say anything about the child's expenses. They say "didn't have earned income that was more than half of the child's support." Whatever you mean by "expenses," it is not the same thing as "support." In particular, support includes tuition paid by the parents, and, as NCperson pointed out in one of your other threads on this subject, support also includes the value of housing provided by the parents. The Form 8615 instructions say the following (addressed to the parents).

"Your support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child's support, count support provided by you, your child, and others."

It then refers you to Pub. 501 for details. In Pub. 501 see "Support Test (To Be a Qualifying Child)" and "Worksheet 2. Worksheet for Determining Support." You can use that worksheet to calculate the child's total support.

I suspect you will find that the child's earned income of $25,000 is less than half of his total support for the year.

You are correct that it doesn't matter how much of his support the child paid by himself. What matters is the amount of his earned income, no matter what he actually used it for.

You seem to be having a lot of trouble with this issue. Since your grandson is an adult, you are not responsible for the accuracy of his tax return. If your grandson is unsure about how to complete his tax return, perhaps he would benefit from consulting a local tax professional for help.

rjs

Level 15

The link in my original reply above was wrong. It linked to the form instead of to the instructions. Here is the correct link for the IRS Instructions for Form 8615. I have also corrected the link in my earlier reply above.