Why does Turbotax say that my dependent child owes $0 in federal taxes when they had income?

[dscek]

So my situation is that I have a dependent child (who was 20 at the end of 2025 and is a single full-time college student). I make too much to claim any education related tax credits for them on my return.

They had $740 in earned income (no taxes were ever deducted from this amount) and $2553 in unearned income (interest + dividends - capital losses). I understand that there is no "kiddie tax" since the unearned income is not above $2700. But Turbotax is saying that they owe $0 in federal taxes when I was expecting that they would still owe a small amount.

When I go into forms mode, on their 1040, their adjusted gross income on line 11a is $3293 ($740 + $2553). And their standard deduction on lines 12e and 14 is $1350. So their taxable income on line 15 is $1943 ($3293 - $1350).

Yet, the tax amounts on lines 16, 18, 22, 23, and 24 are $0. I do not understand why this is so. Shouldn't they owe some taxes on the $1943 amount? According to the 2025 tax table (https://www.irs.gov/publications/p17#d0e49843), I would think that they should owe $194 (10% of $1943).

They do need to file a Form 8615, but because their unearned income is not more than $2700, line 3 is negative and the instructions say "If zero or less, stop; do not complete the rest of this form but do attach it to the child’s return".

They don't have any other tax credits or deductions (besides the $1350 standard deduction for someone claimed as a dependent) so I don't understand why their federal tax liability is $0. On their 2024 tax return, they did have to pay $1594 in state taxes (2024 state tax paid in 2025). Could that have something to do with this? On the 2025 Deductions and Credits screen, this is the only thing that's not $0, which lists $1594 on the "Other Income Taxes" line in the "Estimates and Other Taxes Paid" section.

I'm wondering if there's a Turbotax bug here that's not handling this situation right. Thanks for any ideas.

[Bsch4477]

I’m guessing it’s because the capital gains and qualified dividends aren’t taxed because the taxable income is so low and the earned income is not taxed because it is lower than the standard deduction. 

[dscek]

So I fed my question into ChatGPT and it provided the following explanation. I understood everything up to step 8, but not afterwards about the "final adjustment step". Not sure if ChatGPT is hallucinating.

Step-by-step: IRS Dependent Tax Worksheet

Given:

• Earned income = $740
• Unearned income = $2,553
• AGI = $3,293
• Standard deduction = $1,350
• Taxable income (Form 1040 line 15) = $1,943

---

🔹Step 1: Start with taxable income

Line 1: Taxable income
= $1,943

---

🔹Step 2: Unearned income

Line 2: Unearned income
= $2,553

---

🔹Step 3: Subtract $1,350 (2025 threshold)

Line 3: $2,553 − $1,350 = $1,203

:lia_back[product key removed]ing-right:This is the portion potentially subject to tax

---

🔹Step 4: Compare with taxable income

Line 4: Smaller of:

• Line 1 (taxable income): $1,943
• Line 3: $1,203

:lia_back[product key removed]ing-right:Result = $1,203

---

🔹Step 5: Tax this portion at child’s rate (10%)

Line 5: 10% × $1,203 = $120.30

---

🔹Step 6: Remaining taxable income

Line 6: $1,943 − $1,203 = $740

---

🔹Step 7: Tax remaining income using regular rates

This portion corresponds roughly to earned income.

Since:

• $740 is below the standard deduction equivalent for earned income treatment

:lia_back[product key removed]ing-right:This portion produces $0 tax

---

🔹Step 8: Add the two taxes

• From Step 5: ~$120
• From Step 7: $0

:lia_back[product key removed]ing-right:Total expected tax = ~$120

---

❗So why does TurboTax still show $0?

Because we’re still missing one final adjustment step that the IRS applies implicitly:

🔻The standard deduction already offsets income first

What the worksheet effectively enforces is:

You cannot double-tax income that was already shielded by the standard deduction

In your case:

• The $1,350 standard deduction fully offsets the portion of income that would otherwise be taxed
• When the worksheet recomputes the split between earned/unearned portions, the taxable base collapses

---

🧠 The key subtlety

Even though:

• Line 15 shows $1,943 taxable income

:lia_back[product key removed]ing-right:The worksheet reallocates that income in a way that:

• Applies the deduction primarily against unearned income first
• Leaves no remaining taxable base after thresholds

---

:lia_w[product key removed]-mark:What TurboTax is effectively concluding

After applying all IRS ordering rules:

✔ Taxable income exists on paper
❗But no portion remains that is actually taxable after dependent rules

:lia_back[product key removed]ing-right:Final tax = $0

---

[Bsch4477]

I think the bottom line is that the unearned income is excluded from tax because of the low taxable income and the tax on earned income is absorbed by the standard deduction. Go with the program’s calculation. 

[dscek]

Thanks, yeah, I'm going with the $0 federal tax liability that Turbotax came up with and trusting it's right.

One other data point that might be relevant is that most of the child's unearned income was from qualified dividends. And AI is telling me the following, which I'm not really sure is correct.

• Qualified Dividends/Capital Gains: If any of that $2,553 unearned income includes "qualified dividends" or "long-term capital gains" (common in many investment accounts), that portion is taxed at 0% if the child's total taxable income is below $48,475. TurboTax automatically identifies these lower-rate types of income.

[NCperson]

@dscek that is correct.  Qualfiied Dividends are taxed at the capital gains rate, which for your child is 0%.