Yet another thing I've never seen before.
A new client wants me to prepare his son's return who is under 10 years old. Over $30,000 in interest is reported to his son---the principal amount was given to his son from a lawsuit several years ago.
Well, I immediately thought that the child's income would be subject to the kiddie tax, but low and behold the child's parent's taxable income is $0 due to heavy losses from self employment---I didn't prepare their return.
Now since his son's income is not subject to the kiddie tax, the interest income is now subject to AMT. He doesn't qualify for the under 18 AMT exemption because he has no "earned income". What a mess. Now the child is paying 22% tax on this money.
I was trying to think of ways around this. If they setup a trust and transfer the money to the trust, any taxable income over $10,500 or so is taxed at 35%---yikes.
If the child's parents' taxable income puts them into the 25% bracket or higher in later years, the child's income will be taxed at that rate creating even more tax.
The money is supposedly locked away in a bank, so that if the parent needs access to it---say to pay taxes on the income, the parent must petition the court and hire a lawyer to do so. They said that no trust has been setup and no EIN was applied for.
What a mess. I suppose there is no way around it. I just don't see this too often---never in fact. Just wanted to share my weird story of the week.
A new client wants me to prepare his son's return who is under 10 years old. Over $30,000 in interest is reported to his son---the principal amount was given to his son from a lawsuit several years ago.
Well, I immediately thought that the child's income would be subject to the kiddie tax, but low and behold the child's parent's taxable income is $0 due to heavy losses from self employment---I didn't prepare their return.
Now since his son's income is not subject to the kiddie tax, the interest income is now subject to AMT. He doesn't qualify for the under 18 AMT exemption because he has no "earned income". What a mess. Now the child is paying 22% tax on this money.
I was trying to think of ways around this. If they setup a trust and transfer the money to the trust, any taxable income over $10,500 or so is taxed at 35%---yikes.
If the child's parents' taxable income puts them into the 25% bracket or higher in later years, the child's income will be taxed at that rate creating even more tax.
The money is supposedly locked away in a bank, so that if the parent needs access to it---say to pay taxes on the income, the parent must petition the court and hire a lawyer to do so. They said that no trust has been setup and no EIN was applied for.
What a mess. I suppose there is no way around it. I just don't see this too often---never in fact. Just wanted to share my weird story of the week.
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