19 yr old college student - does Kiddie tax apply if financially independent via gift from parents?

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Topic Author
opus360
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19 yr old college student - does Kiddie tax apply if financially independent via gift from parents?

Post by opus360 »

Asking for a friend here.

His kid does not qualify for financial aid that is loan free (any financial aid has to be paid back). He is thinking of giving appreciated securities (stock) to his 19 year old kid, who is in college. His logic being the long-term capital gains tax rate for single is zero up to $40,400. So, he gives him appreciated securities. Kid does not have to pay taxes on it. Kid then becomes self sufficient via the gift and does not have to depend on parents' support. Will kiddie tax apply in this case or not?
Last edited by opus360 on Thu Jun 10, 2021 3:15 pm, edited 1 time in total.
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gobel
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by gobel »

Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
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opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

gobel wrote: Thu Jun 10, 2021 2:09 pm Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
Thanks. These tax laws are too complicated.

Just to clarify, a 19-24 year old college student then could file as independent single on federal tax return, yet at the same time, the parents are subject to kiddie tax.
123
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by 123 »

opus360 wrote: Thu Jun 10, 2021 1:51 pm ...He is thinking of giving appreciated securities (stock) to his 19 year old kid, who is in college. His logic being the long-term capital gains tax rate for single is zero up to $40,400. So, he gives him appreciated securities. Kid does not have to pay taxes on it....
Just a note: The value of the gift (the current value of the appreciated securities) is limited to $15,000, unless the giver wishes to file a gift tax return. The giver's basis in the gift is not relevant to the value of the gift for purposes of the $15,000 limit.
The closest helping hand is at the end of your own arm.
pshonore
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by pshonore »

opus360 wrote: Thu Jun 10, 2021 2:18 pm
gobel wrote: Thu Jun 10, 2021 2:09 pm Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
Thanks. These tax laws are too complicated.

Just to clarify, a 19-24 year old college student then could file as independent single on federal tax return, yet at the same time, the parents are subject to kiddie tax.
No, the kid is subject to the kiddie tax and most of his unearned income (cap gains, etc) will be taxable at the parents rate.
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opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

123 wrote: Thu Jun 10, 2021 2:42 pm Just a note: The value of the gift (the current value of the appreciated securities) is limited to $15,000, unless the giver wishes to file a gift tax return. The giver's basis in the gift is not relevant to the value of the gift for purposes of the $15,000 limit.
True. In their case, it will be $30,000 limit, as both parents can do the gift.
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opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

pshonore wrote: Thu Jun 10, 2021 2:42 pm
opus360 wrote: Thu Jun 10, 2021 2:18 pm
gobel wrote: Thu Jun 10, 2021 2:09 pm Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
Thanks. These tax laws are too complicated.

Just to clarify, a 19-24 year old college student then could file as independent single on federal tax return, yet at the same time, the parents are subject to kiddie tax.
No, the kid is subject to the kiddie tax and most of his unearned income (cap gains, etc) will be taxable at the parents rate.
Thanks. I was wondering about that. So, in this case, athe savings will come only from the 12.4k standard deduction over the usual 1.1k.
oldfatguy
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by oldfatguy »

opus360 wrote: Thu Jun 10, 2021 1:51 pm Asking for a friend here.

His kid does not qualify for financial aid that is loan free (any financial aid has to be paid back). He is thinking of giving appreciated securities (stock) to his 19 year old kid, who is in college. His logic being the long-term capital gains tax rate for single is zero up to $40,400. So, he gives him appreciated securities. Kid does not have to pay taxes on it. Kid then becomes self sufficient via the gift and does not have to depend on parents' support. Will kiddie tax apply in this case or not?
Just to clarify, since your post references financial aid, the concept of "independence" is different for financial aid than it is for taxes: https://studentaid.gov/apply-for-aid/fa ... dependency

Perhaps your friend already understands this, but I thought it worth mentioning.
pshonore
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by pshonore »

opus360 wrote: Thu Jun 10, 2021 2:49 pm
pshonore wrote: Thu Jun 10, 2021 2:42 pm
opus360 wrote: Thu Jun 10, 2021 2:18 pm
gobel wrote: Thu Jun 10, 2021 2:09 pm Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
Thanks. These tax laws are too complicated.

Just to clarify, a 19-24 year old college student then could file as independent single on federal tax return, yet at the same time, the parents are subject to kiddie tax.
No, the kid is subject to the kiddie tax and most of his unearned income (cap gains, etc) will be taxable at the parents rate.
Thanks. I was wondering about that. So, in this case, athe savings will come only from the 12.4k standard deduction over the usual 1.1k.
Sorry again - according to Kiplinger:
If you can be claimed as a dependent by another taxpayer, your standard deduction for 2021 is limited to the greater of $1,100 or your earned income plus $350.
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opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

oldfatguy wrote: Thu Jun 10, 2021 2:54 pm Just to clarify, since your post references financial aid, the concept of "independence" is different for financial aid than it is for taxes: https://studentaid.gov/apply-for-aid/fa ... dependency

Perhaps your friend already understands this, but I thought it worth mentioning.
Interesting. I learn something new everyday. I'll be sure to pass on this info. I think his kid is still a dependent for financial aid purposes.

Does the CSS Profile have the same/similar questionnaire or classification of who is dependent or independent for financial aid?
Topic Author
opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

pshonore wrote: Thu Jun 10, 2021 2:56 pm Thanks. I was wondering about that. So, in this case, athe savings will come only from the 12.4k standard deduction over the usual 1.1k.
Sorry again - according to Kiplinger:
If you can be claimed as a dependent by another taxpayer, your standard deduction for 2021 is limited to the greater of $1,100 or your earned income plus $350.
[/quote]

I haven't heard that this kid works, but I would be wrong. Thanks for clarifying.
oldfatguy
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by oldfatguy »

opus360 wrote: Thu Jun 10, 2021 3:03 pm
oldfatguy wrote: Thu Jun 10, 2021 2:54 pm Just to clarify, since your post references financial aid, the concept of "independence" is different for financial aid than it is for taxes: https://studentaid.gov/apply-for-aid/fa ... dependency

Perhaps your friend already understands this, but I thought it worth mentioning.
Interesting. I learn something new everyday. I'll be sure to pass on this info. I think his kid is still a dependent for financial aid purposes.

Does the CSS Profile have the same/similar questionnaire or classification of who is dependent or independent for financial aid?
Not sure about the CSS Profile, but it only really matters for awarding federal aid (Pell grants, work-study, subsidized loans), which is determined from the FAFSA. Universities can give institutional aid (i.e., their own money) based on their own criteria.
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gobel
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by gobel »

opus360 wrote: Thu Jun 10, 2021 2:18 pm
gobel wrote: Thu Jun 10, 2021 2:09 pm Student would need earned income > 50% of support to avoid kiddie tax (does not actually have to spend this money on support tho).

If student spends own money on > 50% of support (whether earned or unearned) then they can at least file as independent, and get the whole 12.4k standard deduction, a bit better than the usual 1.1k.
Thanks. These tax laws are too complicated.

Just to clarify, a 19-24 year old college student then could file as independent single on federal tax return, yet at the same time, the parents are subject to kiddie tax.
19-23yo
From the way the requirements are worded (student "provides" determines support qualification/independent filing vs student "earns" determines if kiddie tax is required), I think all 4 combinations are possible:

1. independent, no kiddie tax:
  • student earns and provides > 50% of support
2. independent, kiddie tax:
  • student provides > 50% of support, but does not earn enough
3. dependent, no kiddie tax:
  • student earns > 50% of support, but does not provide it (eg. he saves his money and you pay)
4. dependent, kiddie tax:
  • student does not earn or provide > 50% of support
Also,

1 & 2 get the full standard deduction. 3 & 4 get greater of 1.1k or earnings+350, up to standard
1 & 2 can get the stimulus credits
1 & 2 only student can claim AOTC. 3 & 4 parent claims if parent claims dependent, otw student claims
1 & 3 student qualifies for refundable AOTC if not enough tax liability, not refundable for 2 & 4
986racer
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Re: 19 yr old college student - does Kiddie tax apply if financially independent via gift from parents?

Post by 986racer »

I think there is a 4b in there. Student can be claimed as a dependent but is not.

That student can get AOTC but not any refund on it. Student also doesn’t qualify for stimulus.

EDIT: never mind. I think this is what you were trying to convey by #4
tenkuky
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Re: 19 yr old college student - does Kiddie tax apply if financially independent via gift from parents?

Post by tenkuky »

Not to hijack thread but regarding student self support clause:
If the 529 is in the student’s name (owner and beneficiary) and they receive merit scholarships which allows them to take substantial penalty-free distributions from the 529, can that be considered unearned income that provides > 50% of support if used towards expenses?
That would then be subject to higher limits than the kiddie tax, right?
They file their own returns and are “independent”?
Bank of dad provides very little as a result.

Thanks in advance!
Topic Author
opus360
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Re: 19 yr old college student - does Kiddie tax if financially independent via gift from parents?

Post by opus360 »

gobel wrote: Sat Jun 12, 2021 5:51 pm
19-23yo
From the way the requirements are worded (student "provides" determines support qualification/independent filing vs student "earns" determines if kiddie tax is required), I think all 4 combinations are possible:

1. independent, no kiddie tax:
  • student earns and provides > 50% of support
2. independent, kiddie tax:
  • student provides > 50% of support, but does not earn enough
3. dependent, no kiddie tax:
  • student earns > 50% of support, but does not provide it (eg. he saves his money and you pay)
4. dependent, kiddie tax:
  • student does not earn or provide > 50% of support
Also,

1 & 2 get the full standard deduction. 3 & 4 get greater of 1.1k or earnings+350, up to standard
1 & 2 can get the stimulus credits
1 & 2 only student can claim AOTC. 3 & 4 parent claims if parent claims dependent, otw student claims
1 & 3 student qualifies for refundable AOTC if not enough tax liability, not refundable for 2 & 4
Thank you. Great "table" summary.
TropikThunder
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Re: 19 yr old college student - does Kiddie tax apply if financially independent via gift from parents?

Post by TropikThunder »

I believe this scenario is precisely what the tax writers had in mind when they created the kiddie tax in the first place. Parent wants to give child money. Parent is in high tax bracket. Parent gives appreciated stocks instead so child can harvest capital gains at low tax bracket. IRS says “not so fast….”.
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