How is daughter's tax rate 31%? She received unemployment, subject to Form 8615 "Kiddie Tax", but parent's marginal rate is 22%!

[cloudywithachance]

I was helping my daughter through doing her taxes.  In addition to earned income of around $1.6k, she received unemployment benefits totaling ~$16k, plus she had bank interest of around ~$700 (sign up bonuses) in 2020.  I understand the unearned income is subject to the "Kiddie Tax" which means it's taxed at the marginal rates of her parents (my wife and I), which is firmly in the 22% bracket.

We entered in all my daughter's information, and it did prompt to enter income information for her parents for the 8615 portion, and it passes all the checks and is ready to file, but it's telling her she has a "Blended Tax Rate" (effective tax rate?) of 31%, and shows that her total tax is $5172 on $16653 of taxable income, which does work out to 31%.  But I don't understand how it can be so high when my tax bracket, which the majority of her income would be based on due to Form 8615, is 22%.

See screenshot below for the TurboTax breakdown.  This is after everything was entered and TurboTax said it was ready to file.

[DanaB27]

Yes, for tax year 2020, dependent children with unearned income above a certain amount are taxed at the parents' individual tax rate. The rates for trusts and estates no longer apply for 2020.

Please see What is the 2020 Kiddie Tax? and How do I report and pay the Kiddie Tax on my 2020 return? for details.

[Edited 2/10/2021 | 11:50am PST]

@cloudywithachance 

[cloudywithachance]

@DanaB27 Thanks!

Starting tax year 2020, IRS has reverted to using parent’s tax rate. Per the current instructions for Form 8615, “For tax year 2020, dependent children with unearned income above a certain amount are taxed at the parents' individual tax rate”

[KathrynG3]

Yes, you are correct. However, if your daughter is under age 18 and did not have more than $2,200 in unearned income, you should not include her income on your return. She should file separately. 

See: 

Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)

About Form 8615, Tax for Certain Children Who Have Unearned Income

[cloudywithachance]

@KathrynG3 Thanks!

She is 19 and a full time student. She is filing separately, indicating that she is a dependent. As mentioned above, she had ~$16k in unearned unemployment benefits. The info posted above is from her doing her own taxes in TurboTax (with my assistance). TT automatically brings up the wizard for form 8615 under her tax return and we entered in the information accurately, but it still results in her having a much higher effective tax rate than it should. 

[Opus 17]

Turbotax should be using the 2020 form 8615 and instructions, unfortunately you can't directly view the forms in Turbotax online.  I can try and test this on the desktop program later tonight.  Maybe someone else can look at this,

@macuser_22 @DoninGA @rjs maybe.

Once you finish entering your main data, and get to the filing step, there is a point where you verify your qualifications to use the free version, if you are using the IRS Freefile version.  Then there is a step where you can print your return for review before filing.  that may allow you to print the form and check the calculations.  If the form is wrong, you can go back and make changes, as long as you don't go all the way to the final "Transmit" step 

[cloudywithachance]

I think TurboTax may still be using the 2019 method of calculation, since when it prompted my daughter to enter my taxable income, the instructions on screen referenced the line numbers for the 2019 form, not the 2020 form:

Even though it says "2020", it says 1040, line 11b, which is where taxable income is in the 2019 form 1040.  In the 2020 form 1040, taxable income is line 15.

Alternatively, I wonder if this prompt is asking for just one parent's income, not the joint income (even though it asks if the parents are married and filing jointly).  If I enter half of mine and my wife's total income, then the amount of taxes my daughter owes drops by quite a bit, and makes it almost exactly 22% of her taxable income.

[cloudywithachance]

@Opus 17 Thanks!

I had my daughter try to print the return yesterday, but it made it look like she had to file to be able to do that, so she didn't proceed. I'll have her try again and see what the generated form 8615 in her return actually says, and see if it's incorrect.

[Opus 17]

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@cloudywithachance wrote:

@Opus 17 Thanks!

I had my daughter try to print the return yesterday, but it made it look like she had to file to be able to do that, so she didn't proceed. I'll have her try again and see what the generated form 8615 in her return actually says, and see if it's incorrect.

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You have to go through the file steps to get to the printing option, but there should be a print for review before the actual "Transmit" step.  Although I have not used the IRS free version. 

[macuser_22]

The reference to 1040 line 11b is just a failure to update the words on the display screen to the new line number - simply  cosmetic.

Which parent to use or income is spelled pout by the IRS in the 8615 instructions, page 2 and 6 (line 10).

https://www.irs.gov/pub/irs-pdf/i8615.pdf

[cloudywithachance]

@macuser_22 Thanks!

Since my wife and I are filing jointly, form 1040 line 15 on our return reflect both our incomes.  Should I only input my individual income (I am listed first in our joint return) rather than what's on our 1040 line 15 as instructed?

Thanks to @Opus 17's advice, I was able to print out my daughter's return without filing.  Below is a screenshot of form 8615 from my daughter's return.  It seems that there's something wrong in Part III.  Line 15 says "Enter the tax on the amount in line 14 based on the child's filing status." Line 14's amount is $1,344, yet line 15 says the tax would be $1,804.  This is then added to the $3,368 tentative tax rate based on parent's rate from Part II, on line 16, resulting in the $5,172 total tax amount.

Tax on $1,344 would only be $134, which should appear on line 15.  Instead, notice that line 15 and line 17 have the same $1,804 figure.  It looks like TurboTax is not properly calculating line 15, which should be based on line 14 (not line 4, as line 17 is based on).

[Opus 17]

If you can go to the Tools menu, somewhere there is an option for "send file to agent."  This creates an anonymous version of the file and uploads it to tech support, and gives you a token number.  If you post the token number here, we can forward this for investigation.

The tax on line 15 is probably calculated on an internal worksheet that may be visible if using the desktop program but won't be visible online.  Either someone with a desktop program can test a similar scenario, or we can report this issue and your token number to the moderators and ask them to forward it to tech support.

You could also call customer service and try to get an expert to look at the token number with you on the phone, but tech support for the FreeFile version is extremely limited and it may be hard to convince them to talk to you. 

[cloudywithachance]

@Opus 17 Thanks!  Token number is 733198.

[macuser_22]

@cloudywithachance I noticed that the filing status at the top of the 8615 form says "joint".    

Whose return are you trying to file?     A 8615 form ONLY goes on the child's own tax return, not the parents.

If the child ONLY income was from interest and dividend AND the child's gross in come was less then $11,000 then the parent can elect to report the income on their tax return  with a *8814* form - NOT the 8615 form.    The tax is usually lower of the 8615 is  used on the child's own tax return.

The 8615 seems to be all messed up because by having it on your tax return TurboTax thinks that YOU are the child.

[cloudywithachance]

@macuser_22 Yes those checkboxes are at the top of form 8615 and indicate the parent's filing status.  My wife and I are filing joint.  Our daughter is filing single.  She's been filing her own tax returns for a couple of years, and indicates on her return that she is a dependent since we still claim her.  She is an adult full time student under 24 years old.

I'm asking questions regarding daughter's tax return (which I'm helping her fill out), not mine and my wife' joint return.  Daughter's income in 2020 was mostly from unemployment benefits, not interest and dividends, but it's all unearned and exceeds $2,200 (and exceeds $11,000 too), so form 8615 is required.

(My wife and I do not use TurboTax, so there shouldn't be any chance of our data getting mixed up with our daughter's.  She inputs all of her information, except when TurboTax asks for her parent's information, which it does for form 8615.)