Question

Leon, age 14, is a dependent of his parents. In 2020 he earned $6,500 from a part-time job and $7,500 of interest income on bonds given him by his grandparents, resulting in taxable income of $7,150. Under kiddie tax rules, calculation of tax requires dividing taxable income between net unearned income and other taxable income taxed at his own rate. Leon's taxable income will be divided as follows A) net unearned income -$1,850 and earned taxable income -$5,300. B) net unearned income -$7,150 and earned taxable income -$0. C) net unearned income -$0 and earned taxable income -$7,150. D) net unearned income -$5,300 and earned taxable income -$1,850

Answer 1

Answer:

Leon's taxable income will be divided as follows

B) net unearned income -$7,150 and earned taxable income -$0.

Explanation:

a) Data:

Earnings from part-time job = $6,500

Interest income from grandparents' bonds = $7,500

Taxable income on the interest income = $7,150

b) For 2020, Leon, age 14, can earn up to $12,200 without paying income tax.  This implies that he cannot pay income tax on the $6,500 which he earns from a part-time job.  But he is expected to pay tax on the interest income from bonds given him by his grandparents.  Under the kiddie tax rules, his income is separated between net unearned income and other taxable income taxed at his own rate.