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RLWEA
RLWEA, Accountant
Category: Tax
Satisfied Customers: 69
Experience:  I am an Enrolled Agent with the IRS for 25+ years. Thank you for allowing me to assist you!
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I have to submit a federal and PA state tax form for my son

Resolved Question:

I have to submit a federal and PA state tax form for my son (under 18 and claimed as a dependent by me) who earned $1623 in dividends and capital gains in 2010. An HR Block tax person said I should not owe any money in the end for him but they were going to charge me a couple hundred dollars to file the tax return so I decided to try on my own. I come up with owing ~$50 in PA state tax and $66 in Federal. Is there some trick/deduction that I missed?
Submitted: 5 years ago.
Category: Tax
Expert:  RLWEA replied 5 years ago.

RLWEA :

Hello,

Customer:

hello

RLWEA :

Did you take the standard deduction for your son of $5700? When you are filing a dependent's tax return, they do not get a personal allowance deduction, because you are receiving that...but they are still allowed the standard deduction. I do not believe you took the standard deduction. The other part of the equation, is that your son's tax rate should be the same as yours, it is called Kiddie Tax. See the following article:

RLWEA :

What Does Kiddie Tax Mean?
A special tax law created in 1986 imposed on individuals under 17 years old whose earned income is more than an annually determined threshold. Any extra income earned above of the threshold is taxed at the guardian's rate.

RLWEA :

This law is designed to prevent parents from exploiting a tax loophole where their children are given large "gifts" of stock. The child would then realize any gains from the investments and be taxed at a far lower rate compared to if the parents had realized the stock's gains.

Originally, the tax only covered children under 14 years of age as they cannot legally work and therefore any income was usually the results of dividends or interest from bonds. However, the tax authorities realized that some parents would take advantage of the situation by giving stock gifts to their older, 16-to-18-year-old children.

Customer:

From what I read I thought I understood that if I took him as a dependent I couldn't take a 5700 deduction for him on his tax return but instead a $950 deduction. If I can take the 5700 then that solves my problem. If I cannot then it says either $950 or earned income + $300. Is the dividends and capital gains considered earned or unearned?

RLWEA :

Give me a moment to look up what you are referring to -the $950 rule...this is not something I have run itno yet tis tax e=season, and we had alot f new IRS changes...will you wait a moment?

Customer:

yes

RLWEA :

I am sorry, you are correct. The $5700 deduction was removed in 2009, unless the child had earned income, which as you are aware invesment income is unearned. All ican say is that the H & R Block people did not remember this new ruling either.

RLWEA :

So based on that your tax calculation sound correct. They are still less ten the charge H&R Block would have levied to prepare your child return. I applaud your willingness to do it on your own.

RLWEA :

Also, if the IRS find an error in your calculations, believe it or not they will automatically refund the amount.

RLWEA :

The $950 was just put into effect in 2010, decided upon in 2009.

RLWEA :

Have I answered your question?

Customer:

Yes, bummer for me! But at least I now know I'm doing the right thing. Thanks

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