Nephew (Dependent/Student) made less than $9,000 and Turbo Tax shows he owes over $2,000 Federal Tax?

Forum|Forum|5 years ago
March 16, 2021
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My nephew is a full-time student. He is a dependent. He made a little over $400 (they took out federal tax) and received unemployment pay a little over $8,000 (only took out $30 federal tax). I completed his return as a dependent and after I entered his parents' taxable income Turbo Tax shows he owes a little over $2,000? How can this be if his total income is under $9,000? Otherwise prior to entering his parents taxable income he only owed a little over $700.

TurboTax Home & Biz Windows

WassellWAuthor

Oh and his parents' taxable income was over $90,000.

DavidD66

The IRS defines “earned income” as the compensation you receive from employment and self-employment. Specifically excluded from this definition is any unemployment compensation you receive from your state.

In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate. This tax treatment has gained a nickname: the "kiddie tax."

The Kiddie Tax applies to all children who are 18 years of age or under—or dependent full-time students under 23. The kiddie tax applies to most unearned income that a child receives and does not apply to any salary or wages.

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WassellWAuthor

Thank you for the information and link.

Hal_Al

Employee

Unemployment compensation is unearned income. As such the student-dependent only gets $1100 standard deduction (not $12,400). More importantly, that unearned income is subject to the kiddie tax, where his income is taxed as his parent's marginal tax rate.

Now the good news: based on the new covid law, the first $10,200 of unemployment is now tax free, on 2020 tax returns.

You should wait for TurboTax to update the software before filing. Or see these instructions for filing a paper return: https://www.irs.gov/faqs/irs-procedures/forms-publications/new-exclusion-of-up-to-10200-of-unemploym...