Glen and Mary have two children,Chad,age 12,and Linda,age 8.For 2013,Chad has $4,000 in net unearned income and Linda has net unearned income of $1,000.If the total parental tax for 2013 is $1,400,how would the tax be allocated between Chad and Linda?

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Quizplus · Accepted Answer

First, we need to calculate the parental tax if both children did not have any net unearned income. This is called the "baseline parental tax" and will be used as a reference point for calculating the tax allocation. 
The baseline parental tax can be calculated using the tax brackets and rates for 2013. Assuming Glen and Mary are married filing jointly, the first $17,850 of their taxable income is taxed at 10%, the next $57,150 is taxed at 15%, and any additional income is taxed at 25%. Since we don't know their exact taxable income, we'll just assume it falls somewhere in the 15% tax bracket. This means their baseline parental tax would be: 
Baseline parental tax = 0.15 x $57,150 = $8,572.50 
Next, we need to calculate how much of the parental tax is attributable to Chad and Linda's net unearned income. To do this, we'll use the kiddie tax rules. Under these rules, a child's net unearned income is taxed at the parent's marginal tax rate if it exceeds a certain threshold ($2,000 for 2013). In this case, Chad's net unearned income exceeds the threshold, so we'll calculate the tax attributable to his income first: 
Tax on Chad's income = 0.25 x ($4,000 - $2,000) = $500 
Note that we used the 25% tax rate since we assumed the parents' taxable income falls in that bracket. 
Now we'll calculate the tax attributable to Linda's income: 
Tax on Linda's income = 0.25 x $1,000 = $250 
Finally, we'll allocate the $1,400 total parental tax between Chad and Linda based on the ratio of their individual tax liabilities: 
Allocation to Chad = $500 / ($500 + $250) x $1,400 = $1,120 
Allocation to Linda = $250 / ($500 + $250) x $1,400 = $280 
So the answer is C, $1,120 to Chad and $280 to Linda.

Glen and Mary Have Two Children,Chad,age 12,and Linda,age 8