Ivan Trent, age five, receive $2,900 of dividends per year from a mutual fund he owns; it is his only source of taxable income. Ivan's parents plan to gift a corporate bond they currently own to him. The bond pays $4,100 of interest income per year. Ivan's parents are in the 37% tax bracket. The individual income tax rate schedule that generally applies to a single taxpayer indicates a 10% tax rate until taxable income of $9,525. Ivan's family will save tax at the rate of 27% (37% - 10% tax rates) on the bond interest income if the parents transfer the bond to Ivan.

Question

Quizplus · Accepted Answer

The "kiddie tax" rules apply to unearned income for children under 19 (or under 24 if a full-time student), meaning Ivan's unearned income over a certain threshold will be taxed at the parent's rate, not Ivan's lower rate. Therefore, the family will not save tax at the rate of 27% on the bond interest income.

Ivan Trent, Age Five, Receive $2,900 of Dividends Per Year