Dependent Rules & Kiddie Tax for Unemployment

Question

Hello all,My situation is somewhat complicated, so bear with me. I am preparing this return using ProSeries Professional 2020.My client is a full-time college student aged 23 who lived at home with his mom throughout all of 2020. He received approximately $17,000 in unemployment comp while also having a W2 for approximately $3,800. Throughout the year he used nearly all of the money, including both "earned" and "unearned" income sources, to support himself. His mom's AGI is approximately $30,000 and she is able to file as HOH due to his younger brother and sister still being in the house. Due to his mom's low AGI she qualifies for "affordable living" in the complex where they reside thus making the overhead for house expenses significantly decreased.My question has a few parts: 1. Does unemployment income count when performing the support test of a qualifying child?Being that my client is under 24 and a full-time student, while also living at home, he meets all other dependent tests beside the support test (if unemployment income is factored in as useable for support).2. Would Form 8615 be required if he supports himself using UNEARNED income?The way the question is phrased on the 8615 leads me to believe that only earned income is used in determining support on this form. This would mean that the $3,800 of W2 wages would be the only income considered in determining support, making him fill out the form as he reasonably could not support himself on only $3,800 worth of income.3. Can my client be both independent and required to fill out form 8615?In a normal year a student in this case would not qualify for unemployment comp based on the scenario thus eliminating the need for the kiddie tax form entirely. By not qualifying as a dependent, my client would also be entitled to receive the recovery rebate credit (stimulus) and any future stimulus payments that get passed.I appreciate any information on this subject as my research has led me to a dead end. Thank you.

TaxGuyBill · Accepted Answer

@Nick G wrote:1. Does unemployment income count when performing the support test of a qualifying child?Being that my client is under 24 and a full-time student, while also living at home, he meets all other dependent tests beside the support test (if unemployment income is factored in as useable for support).2. Would Form 8615 be required if he supports himself using UNEARNED income?The way the question is phrased on the 8615 leads me to believe that only earned income is used in determining support on this form. This would mean that the $3,800 of W2 wages would be the only income considered in determining support, making him fill out the form as he reasonably could not support himself on only $3,800 worth of income.3. Can my client be both independent and required to fill out form 8615?In a normal year a student in this case would not qualify for unemployment comp based on the scenario thus eliminating the need for the kiddie tax form entirely. By not qualifying as a dependent, my client would also be entitled to receive the recovery rebate credit (stimulus) and any future stimulus payments that get passed.1) "Income" does not count for the Support Test.  Money SPENT counts for the support test.  That could be from anywhere, including earned income, unearned income, gifts or savings.2) Yes.  The Kiddie Tax applies unless the child provides over 1/2 of their support with EARNED income.  As you said, that did not happen with $3800 of income, so the Kiddie Tax applies.3)  Yes.  A non-dependent may still be required to pay Kiddie Tax.  The Kiddie Tax is not based on being a dependent, but on the rules that you have pointed out.

Raj3 · Answer

In this case you need to see multiple test for multiple tax treatment:

1st test: whether they are required to file.

{in your case your client is required to file tax return}

Single dependents—Were up to age 65 or NO blind:
You must file a return if any of the following apply.
1. Your unearned income was more than $1,100.
2. Your earned income was more than $12,400.
3. Your gross income was more than the larger of—
a. $1,100, or
b. Your earned income (up to $12,050) plus $350.

2nd test: Unearned Income and Form 8615 [UI is unearned income by definition]:

{in your case your client is required to file this 8615 form and use the parent's tax rate for tax computation}

Form 8615 must be filed for any child who meets all of the following
conditions.
1. The child had more than $2,200 of unearned income.
2. The child is required to file a tax return.

3. The child either:
a. Was under age 18 at the end of 2020,
b. Was age 18 at the end of 2020 and didn’t have earned
income that was more than half of the child's support, or
c. Was a full-time student at least age 19 and under age 24 at
the end of 2020 and didn’t have earned income that was more than
half of the child's support.
(Earned income is defined later. Support is defined below.)
4. At least one of the child's parents was alive at the end of
2020.
5. The child doesn’t file a joint return for 2020.
[For these rules, the term “child” includes a legally adopted child
and a stepchild. These rules apply whether or not the child is a
dependent. These rules don’t apply if neither of the child’s parents
were living at the end of the year.]

3rd Test: To determine whether one is dependent?

{in your case the client is NON DEPENDENT due to #i.4 or #ii.3 support test as listed below}. They loose American Opportunity Tax Credit see 4th Test below.

Who is Dependent?
i) Tests To Be a Qualifying Child

1. The child must be your son, daughter, stepchild, foster child, brother,
sister, half brother, half sister, stepbrother, stepsister, or a descendant of
any of them.
2. The child must be (a) under age 19 at the end of the year and younger
than you (or your spouse if filing jointly), (b) under age 24 at the end of the
year, a student, and younger than you (or your spouse if filing jointly), or
(c) any age if permanently and totally disabled.
3. The child must have lived with you for more than half of the year.2
4. The child must not have provided more than half of his or her own support
for the year.
5. The child must not be filing a joint return for the year (unless that joint return is file

ii) Tests To Be a Qualifying Relative
1. The person can't be your qualifying child or the qualifying
child of any other taxpayer.
2. The person either (a) must be related to you in one of the
ways listed under Relatives who don't have to live with you, or
(b) must live with you all year as a member of your
household
(and your relationship must not violate local law).
3. The person's gross income for the year must be less than
$4,300.
4. You must provide more than half of the person's total support
for the year.

4th Test: American Opportunity Tax Credit Form 8863

If one becomes non dependent then they may not get American opportunity tax credits (form 8863) unless they have EARNED income exceeding one-half of the support and few other test as listed below.

1. Were you a full-time student during any part of five months during 2020?

2. Did your earned income exceed on-half of your support?

3. Was at least one of your parents alive on December 31, 2020?

thank you

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