Kiddie Tax and Inherited IRA

[bgoodreau01]

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.

[Bsch4477]

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

[NCperson]

@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]

@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.

[rjs]

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.

[bgoodreau01]

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]

@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.

[AmeliesUncle]

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@bgoodreau01 wrote:

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.

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I agree with you; the Kiddie tax does not apply.

That is the literal reading of the law (he only has to have received earned income in excess of half of his support; he doesn't need to pay his support) and I've never seen anything official that interprets it otherwise.

[NCperson]

@AmeliesUncle please help me with your response.  Support includes 'fair share' of the parents housing expense and the child's educational expenses, right? 

<<he need not have "paid" for half his expenses, he need only have "earned" more than half his expenses.>>

The IRS publication states "support costs"; where does it state "expenses"? 

"Was a full-time student at least age 19 and under age 24 at the end of 2024 and didn’t have earned income that was more than half of the child's support."

What if the student's parent's live in a multi-million dollar mansion and the student is an only child.  The "fair rental value" is going to be quite high.  What if the student went to a private college? the educational cost would be quite high.   and therefore the support costs would be quite high. 

On the otherhand if the student when to a public university and the parents live in a small home with many dependents, that would change the outcome as the support costs would be a lot less. 

How can any of us be sure that earned income exceeds half the support cost to be certain the student is not beholden to kiddie tax? 

The support cost is determined on lines 6-19  of the worksheet (page 16 of Pub 501), so if his earned income is more than 1/2 of Line 19, then no "kiddie tax" implications .  How would any of us know whether that is true? 

I agree the support costs can not be actual costs, if only because the housing costs are inferred as the "fair rental value" of the home (line 6b).  There is no reason the rest of the costs wouldn't be actual support costs. 

https://www.irs.gov/pub/irs-pdf/p501.pdf

[AmeliesUncle]

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@NCperson wrote:

The IRS publication states "support costs"; where does it state "expenses"? 

The support cost is determined on lines 6-19  of the worksheet (page 16 of Pub 501), so if his earned income is more than 1/2 of Line 19, then no "kiddie tax" implications .  How would any of us know whether that is true? 

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I agree that it is "support", not "expenses".  Thank you for that clarification.

As you said, the taxpayer need to know the amount of support, and using that worksheet in Publication 501 is a great way to do that.

Once a person knows the amount of support, then it can be contrasted with the amount of earned income.  But the point that the OP and I were making is that the child does NOT need to pay any support with that earned income.  The Kiddie Tax is merely comparing the amount of support with the amount of earned income, regardless of who actually pays the support.

[NCperson]

@AmeliesUncle Thank you

<<But the point that the OP and I were making is that the child does NOT need to pay any support with that earned income. >>

yes, I agree as well. 

<<The Kiddie Tax is merely comparing the amount of support with the amount of earned income, regardless of who actually pays the support.>>

I agree, and that is the way the worksheet works (lines 6-19), but from the OP's responses, I am not confident that the OP understands how "support costs" are defined.  I'd just like to see the OP acknowledge with "Yes, I will complete the worksheet" to answer the questions I am asking."    

thank you again! 

[AmeliesUncle]

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@NCperson wrote:    

thank you again! 

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You you for keeping me on my toes and making sure things are accurate.  🙂

[bgoodreau01]

Thank you all for your time to help me understand. I did review Pub 501 and specidfically lines 6 thru 19. I guess I don't fully understand the difference between expense and support because both are used there, but I do understand the calculation of support and "yes" my grandson and his parents will complete Form 501.

If I may I would like to confirm what I think you all have said and confirm the kiddie tax would "not" apply:

1. He will have "earned" income in excess of half the support his parents will have provided him this year, hence the kiddie tax does not apply. Isthat correct? (...but his parents will have provided more than half that support).

2. Because 1 above is true, then he is not required to complete form 8615. What is not clear is just because he does not have to complete Form 8615, does that in itself mean the kiddie tax does not apply?

3. As it relates to the kiddie tax it does not matter if his parents claim him as a dependent (they will not claim him even though he meets the definition of a qualified dependent) but I have read elsewhere it is not "if they did/will", it matters "if they could" claim him. (By the way my tax accountant said because they don't claim him, that in itself means the kiddie tax does apply. I'm not so sure he is correct and that is why I went to this TT community for help).

Thank you for your expertise and patience with me...

[rjs]

@bgoodreau01 

All of your questions have been answered in earlier replies, but I'll go over it again

1. He will have "earned" income in excess of half the support his parents will have provided him this year, hence the kiddie tax does not apply. Is that correct? (...but his parents will have provided more than half that support).

No that's not correct. To avoid kiddie tax his earned income has to be more than half of his total support for the year, not just the support that his parents provided. Surely he will have provided some of his own support, especially now that he is working. 

Furthermore, we don't know whether his earned income will actually be more than half of his support. Until someone actually adds up all of his support, such as by completing the worksheet, we are not really sure how much it is. Also, you are making an assumption about how much his earned income will be for the year. There are still five months left in the year. Unexpected things could happen that increase or decrease his earned income. It's his actual earned income for the year that matters, not how much you think it will be based on what you know in July.

2. Because 1 above is true, then he is not required to complete form 8615. What is not clear is just because he does not have to complete Form 8615, does that in itself mean the kiddie tax does not apply?

Well, as I just said, we don't know for sure that "1 above is true."

Whether kiddie tax applies, and whether he has to file Form 8615, are the same thing. Form 8615 calculates the kiddie tax.

If kiddie tax applies, he has to file Form 8615.

If kiddie tax does not apply, he does not have to file Form 8615.

If he has to file Form 8615, it's because kiddie tax applies.

If he does not have to file Form 8615, it's because kiddie tax does not apply.

3. As it relates to the kiddie tax it does not matter if his parents claim him as a dependent (they will not claim him even though he meets the definition of a qualified dependent) but I have read elsewhere it is not "if they did/will", it matters "if they could" claim him. (By the way my tax accountant said because they don't claim him, that in itself means the kiddie tax does apply. I'm not so sure he is correct and that is why I went to this TT community for help).

All of this concern about being a dependent is an unnecessary distraction. Being a dependent or not being a dependent has nothing to do with whether kiddie tax applies or whether Form 8615 is needed. Claim / not claim / meets the definition / did / will / could / don't is all irrelevant. It has nothing to do with kiddie tax.

Your accountant is wrong. Whether or not the parents claim your grandson as a dependent has nothing to do with whether kiddie tax applies. Maybe you need a new accountant, preferably someone who can read the rules for kiddie tax.

Thank you for your expertise and patience with me...

My patience is wearing thin. You have gotten the same answers multiple times, from multiple people.

[rjs]

@bgoodreau01 

With all the discussion of the minutiae of kiddie tax, we may have lost sight of the underlying question, which is whether your grandson should liquidate his entire $30,000 inherited IRA this year. (It might be more than $30,000 by the end of the year.) There's a risk we haven't mentioned that I think your grandson should consider.

With $30,000 or more of unearned income, being under 24 and a student, and with relatively little earned income, if your grandson does not include kiddie tax on his tax return it might raise questions at the IRS. They could audit him as late as 2029, asking him to show why kiddie tax does not apply. If he concludes that his relatively low earned income is more than half of his total support for the year, he better have accurate, detailed, convincing records to show how he calculated his total support. If he is audited and the IRS doesn't accept his explanation, he will end up having to pay the kiddie tax plus penalties and interest. He has to weigh the possible tax savings this year against the risk of an audit. Has he calculated how much he would actually save in taxes?