Unemployment income and kiddie tax
Is unemployment income subject to kiddie tax? Short answer is yes, find out more here.
Q: Is unemployment income subject to kiddie tax?
Pat and Nikki claimed their daughter Eloise on their 2020 tax return. In 2020 Eloise was 20 years old and a full-time student. She earned about $2,500 in the beginning of 2020 from a part-time job at a community center. Then the center closed because of the pandemic and Eloise collected unemployment of about $13,000. She was not self-supporting; Pat and Nikki continued to pay most of her expenses. They received the $500 other dependent credit and the American opportunity credit. Will Eloise be subject to kiddie tax in 2020? Would it make a difference if she was not claimed as a dependent? What about AMT?
A: Unemployment income is considered unearned income for kiddie tax purposes.
Yes, Eloise will be subject to the kiddie tax because of her unemployment compensation.
Children who are subject to the kiddie tax
The tax on unearned income of children, known as the kiddie tax, applies when the child has unearned income of more than $2,200 (for 2020) and all the following apply:
- At the end of the tax year the child was
- Under age 18, or
- Age 18 and didn’t have earned income that was more than one-half of the child’s support, or
- A full-time student age 19-23 and didn’t have earned income that was more than one-half of the child’s support.
- At least one of the child’s parents was alive at the end of the year.
- The child is required to file a tax return for the year.
- The child doesn’t file a joint tax return for the year.
Applying these criteria to Eloise, in 2020 she was 20 years old, a full-time student, presumably not married, and had two living parents. She had unearned income of $13,000, which is more than the 2020 unearned income thresholds of $2,200 for kiddie tax and $1,100 for the dependent filing requirement. She did not provide more than half of her own support from her earned income.
Unemployment compensation is subject to kiddie tax
Unearned income is not limited to investment income such as dividends and interest. It includes any type of income that isn’t earned income, including unemployment compensation, taxable social security benefits, alimony, some taxable scholarships, and more.
Eloise will have to file her 2020 tax return as a dependent and complete Form 8615, Tax for Certain Children Who Have Unearned Income to calculate the kiddie tax based on her parents’ tax rates.
The AMT exemption is $72,900 (for 2020) for single filers. Before the SECURE Act, a much lower AMT exemption applied to children subject to kiddie tax. In 2017 the exemption was $7,500 plus earned income. Under the SECURE Act, starting in 2018, there is no special kiddie tax exemption, i.e. the same inflation-adjusted AMT exemption applies to all filers. Because of the higher AMT exemption amount, Eloise will not pay AMT in 2020 and does not have to file Form 6251.
Kiddie tax vs. dependency status
Note that Eloise is subject to kiddie tax because she meets the criteria explained above and not because she is a dependent, whether or not her parents claim her.
Eloise is a dependent because she meets the qualifying child age, relationship, residency, and support tests with respect to her parents Pat and Nikki. The dependency rules and the kiddie tax rules are similar, but they are not identical. For example, Eloise would not meet the qualifying child support test if she provided more than half of her own support from her total income and her other sources of support. In contrast, she would not meet the kiddie tax support threshold if she provided more than half of her own support based on her earned income only.
Non-dependents may be subject to kiddie tax. Suppose that in 2020 Eloise was not Pat’s and Nikki’s dependent because she did pay more than half of her expenses from her total income of $15,500 and any other sources of support she may have, such as personal savings. In that case, she would file her 2020 tax return as a non-dependent. However, assuming she did not pay more than half of her expenses from her $2,500 earned income alone, the kiddie tax would still apply. The same would hold true if she were not a dependent for some other reason, such as not living with her parents more than half the year.
Originally published in the March 3, 2021 edition of TAX in the News.