Child income 4-H FFA

[TAXMAN]

I am wondering how you may treat childs income from selling animals at fairs etc? Some of these kids make real good money esp when relatives get in a bidding war.

I have heard net on line 21. Does not match 1099 received IRS cp 2000 later?

I have heard put on Sch D with cost being basis and sales price = form 1099 and show as long term.

I have heard subject to Kiddie tax.

Open for for suggestions. I did check Farmers tax guide. It says other income. Kiddie tax?

Thanks to all.

[Lion EA]

I'd go with the Farmers' Tax Guide and use line 21. Depending on your software, it may generate a statement when you enter the Forms 1099 and the COGS to get the net income reported. Almost everything except earned income/SE tax income triggers Kiddie Tax. Do you have any contacts in 4H country? IL tax school or something that might go into greater detail than the FTG?

[kcjenkins]

Line 21

2 entries, first = 1099 second = Cost basis plus any deductible expenses, entered as a negative number.

[Mr. Pencil]

I did check Farmers tax guide. It says other income. Kiddie tax?

That sounds right. It wouldn't normally look like a business, and there is too much personal activity to look like an investment. So line 21 for netting sales with cost of goods sold (like feed and vet bills). Schedule A for other expenses (not to exceed income). Kiddie tax certainly, but must be reported on separate return.

[TAXMAN]

Not sure I understand why the kiddie tax. This could be Gawd awful to these kids. Afterall they are in it for the learning exp and possibility of making some $ for educational cost.

[Lion EA]

Why? It's the law. Not much different than transferring a stock to a child in a lower tax bracket. The child may be selling the animal, but it's probably the parents who own the barn and the grazing land and maybe even pay the vet and the feed and grain bills and drove the animal to the state fair and.... But, it's really the definition that determines what's subject to kiddie tax, and it's almost anything that's not earned income. So, yes the child saves SE tax, but over $1,900 (is that the 2013 #?) will use his parents' tax rate. I think lottery winnings are subject to kiddie tax, too.

[kcjenkins]

Rev. Proc. 2012-41

SECTION 3. 2013 ADJUSTED ITEMS

.01 Unearned Income of Minor Children Taxed as if Parent’s Income (the “Kiddie Tax”). For taxable years beginning in 2013, the amount in § 1(g)(4)(A)(ii)(I), which is used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000. This $1,000 amount is the same as the amount provided in § 63©(5)(A), as adjusted for inflation. The same $1,000 amount is used for purposes of § 1(g)(7) (that is, to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”). For example, one of the requirements for the parental election is that a child’s gross income is more than the amount referenced in § 1(g)(4)(A)(ii)(I) but less than 10 times that amount; thus, a child’s gross income for 2013 must be more than $1,000 but less than $10,000.

[kcjenkins]

4-H Club or FFA project. If an individual par­ticipates in a 4­H Club or Future Farmers of America (FFA) project, any net income received from sales or prizes related to the project may be subject to income tax. Report the net income as “Other income” on line 21 of Form 1040. If necessary, attach a statement showing the gross income and expenses. The net income may not be subject to SE tax if the project is pri­marily for educational purposes and not for profit, and is completed by the individual under the rules and economic restrictions of the spon­soring 4­H or FFA organization. Such a project is generally not considered a trade or business.

I do not have a specific cite, but I have never treated these as subject to kiddie tax, which is on "unearned income". The kids earn the income by doing a great job of raising and caring for an animal, grooming and showing them. Lots of hard work involved before you win prizes or sell your animal. And, at least once, I had a client who's daughter made enough from her Heifer to need to file a return for it, and the parents were well above the minimum rate, but on their audit no questions were raised about kiddie tax in her return.

[Mr. Pencil]

I have never treated these as subject to kiddie tax, which is on "unearned income".

I don't see how that could work. Doesn't the software pick up other income from line 21? The instructions say, "For Form 8615, 'unearned income' includes all taxable income other than earned income." Then for Line 1 it says, "If the child had no earned income (defined below), enter the child's adjusted gross income." And "below" in the instructions, earned income is pretty narrowly defined as Lines 7, 12, and 18 of Form 1040.

[TAXMAN]

This leaves me to believe no kiddie tax and no se tax. Funny to have income that is neither earned or unearned in same situation. Must be the law?

[Richcpaman]

Actually... it could be treated this way, sort of like "Intern" pay at Hospitals and Colleges. You are making some money, but its for the education.

Rich