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

Forum|Forum|5 years ago
February 10, 2021
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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.

TurboTax Free Edition Online

Best answer by rjs

@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.)

@cloudywithachance There does seem to be a problem with the calculations on Form 8615. In playing with this, by chance I noticed an anomaly that might give you a way to work around the problem.

Do you have any qualified dividends on you and your wife's joint tax return? If not, go through the Child's Income interview again, and enter $1 in "Parent's Qualified Dividends." When you press Tab or click Continue you should see the tax due amount get reduced. Go back and delete the qualified dividends that you entered, or change it to zero. Then proceed through the rest of the Child's Income interview until you get back to the income summary screen. Does Form 8615 look correct now, and is the effective tax rate about what you expect?

@Opus 17 @macuser_22

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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

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cloudywithachanceAuthor

@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