Covid Unemployment Tax Relief vs. Kiddie Tax - Which Wins?

[Mn817]

My son lived at home last year (2020) and was a full time college student.   He collected about $10k in unemployment and had about $10k in wages.   I claimed him as dependent and have an AGI of well over $200k.   Turbotax says he must pay "kiddie tax" at my higher rate on the unemployment.   Can we get relief under the new Covid relief on the unemployment income, or does the Kiddie tax trump the $150k income exemption for unemployment?    Does it make sense for me to amend my return and not claim him as a dependent? 

[LenaH]

No. It is very likely that he will still be subject to "kiddie tax" due to your total household income. In addition, kiddie tax does not depend on whether or not he is a dependent. 

Form 8615, Tax for Certain Children Who Have Unearned Income, is required when a child meets all of the following conditions:

1. The child had more than $2,200 of unearned income.
2. The child is required to file a tax return.
3. The child either:
   1. Was under age 18 at the end of 2020,
   2. Was age 18 at the end of 2020 and didn’t have earned income that was more than half of the child's support, or
   3. Was a full-time student at least age 19 and under age 24 at the end of 2020 and didn’t have earned income that was more than half of the child's support.
4. At least one of the child's parents was alive at the end of 2020.
5. The child doesn’t file a joint return for 2020.

As part of the recently passed American Rescue Plan, the first $10,200 worth of unemployment payments are now tax-free for households with annual incomes less than $150,000. This expanded tax relief begins this year, starting for taxpayers filing returns after January 1, 2020.  

Since you stated your adjusted gross income was well over $200,000, and this will be entered on his return in order to calculate the kiddie tax at your tax rate, then he is most likely not eligible to an exclusion of unemployment based on the guidance the IRS has given so far. 

[AmeliesUncle]

Your income does NOT affect your child's ability to claim the Unemployment Exemption.  "Family income" means husband and wife on a joint tax return.  The child's income does not get factored in for the $150,000 threshold for the Unemployment Exclusion on your tax return, and your income does not get factored in for the $150,000 threshold on your child's tax return.

[Nlexi912]

Just so I understand the above question and answer can you please clarify. I feel I’m in the same situation with a daughter who is 21 and in college full time collected 10,500 in unemployment plus $1700 in earned income. My income was $110,000 and when I did my daughters taxes it came out that she owed $3000 to the government based on the kiddie tax. We were both shocked. With the new relief tax and exemption of $10,200 for unemployment and my income being under $150,000 can I assume she will no longer owe that much to the government?  I did not submit her taxes yet because we didn’t have the money. I’m hoping if we redo her taxes we will see a difference in what she owes? 

[DaveF1006]

Yes, the $10,200 unemployment exemption will make a difference in your tax return. Since this is a new provision, the IRS has not rolled that out into their tax forms yet so don't file her taxes as of yet. In the meantime, please read this Turbo Tax link. Within the link is an opportunity for you to sign up and be notified when the unemployment update is available in Turbo Tax.