Question

ary is 2 years old and earned $10,000 in interest income orn funds given to her by her grandparents. Mary's Parents are in the 25% marginal federal income tax bracket. Mary's Grandparents are in the 33% Marginal Income Tax Bracket a. Calculate Mary's 2017 taxable income. b. Calculate Mary's 2017 federal income tax. c. Calculate Mary's 2017 federal income tax if the $ 10,000 were qualified dividend income instead of interest income

Answer 1

As Mary is 2 years old she is a dependent as per federal tax laws . A child can file income tax return on his /her own . But here mary is only 2 years old , she can't file income tax return on her own. Her parents on her behalf has to file her income tax return and signs on her behalf.

Income has to be segregated as earned and unearned income . Earned income means income that will earned by doing job or work. Unearned income means which is derived without doing any work I.e., interest and dividend incomes.

If earned income is more than $6350 or unearned income is more than $1050 then child requires to file return . But if unearned income is between $1050 to $ 10500 then such income can be reported either parents return or on own child return.

Im this case mary has unearned income of $10000 she is required to file return on her name.

1.Her taxable income will be arrived after deducting the federal bracket. So from $10000 we need to deduct $1050 , so her taxable income is $8950

2.Her income will be taxable at the marginal tax rate as their grand parents are diverting their income in the form of investments to their grand child. So such taxable income of $8950 will be taxable at the tax bracket of 39.6%. So her federal tax will be $3544.20 .

3. If mary has qualified dividend income only then she is not required to pay tax. As qualified dividsnd income is exempted from tax.