Question

37. LO.3, 7 Taylor, age 18, is claimed as a dependent by her parents. For 2019, she has the following income: $4,000 wages from a summer job, $1,800 interest from a money market account, and $2,000 interest from City of Boston bonds. a. What is Taylor's taxable income for 2019? b. What is Taylor's tax for 2019?

Answer 1

a). $1,450

Calculation

Wages	4,000
Money market interest	1,800
Bond interest (City of Boston bond interest is tax-exempt.)	0
Gross Income	5,800
Less: Standard deduction [Note 1]	(4,350)
Taxable income	1,450

Notes :

[Note 1] : According to IRS Topic No. 551-Standard Deduction, If you can be claimed as a dependent by another taxpayer, your standard deduction for 2019 is limited to the greater of: (1) $1,100, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status). So here, Taylor is claimed as dependent by her parents and $4,000 is the earned income of Taylor, then standared deduction is $4,000 + $350 = $4,350.

b). $145

Calculation

Net Unearned Income Calculation:
Money market account interest	$1,800
City of Boston bond interest	0
Total unearned income	$1,800
Minus: threshold amount of $2,200 for 2019 [Note 2]	2,200
Net unearned income	0
Income taxed at Taylor's rate [Taxable income from Calculation 1]	1,450
Total tax ($1,450 x 10%) [Note 3]	$145

Notes :

[Note 2] : The Tax Cuts and Jobs Act of 2017 modified the tax rates and brackets used to figure the tax on 2019 unearned income for certain children. Unless you elect to calculate your tax based on the tax rate of your parent, all net unearned income over a threshold amount of $2,200 for 2019 will be taxed using the brackets and rates for estates and trusts. So here, for Taylor we have set $2,200 threshold and her unearned income is less than the threshold. Hence net unearned income became 0.

[Note 3] : Taylor's unearned income is not more than $2,200, her tax is determined using the Single Tax Rate Schedule.