Richcpaman Posted February 9, 2014 Report Share Posted February 9, 2014 Had a client call me. Makes good money every year, greater than $300k. Has two kids, one is going to college in September. Each child has a trust. That trust has no liquid assets, but that is going to change. (Big sale for cash..and then convert into a income property of +$50k a year.) If the trust pays a salary to the child, say, $10k, and then the trust pays the child's college expenses and other support, say, $30k a year, then the child can not be claimed by the parents, because the trust is paying all the bills correct? Would the child then be subject to the Kiddie tax? I can find out some of the pieces, but no a comprehensive example. Thoughts? Rich Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted February 9, 2014 Report Share Posted February 9, 2014 Yes to Kiddie tax because of dependent child status. The child must still be considered part of the parent's household for FAFSA and financial aid status. If this was an attempt to get grants from Uncle Sam, it is prohibited due to the regulations. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted February 9, 2014 Author Report Share Posted February 9, 2014 Not trying to short the FAFSA Just wondering if the order changes, if the trust pays the expenses. Since the parents are not. Rich Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 9, 2014 Report Share Posted February 9, 2014 Rich, you didn't say how old the children are, and you might need to run the support calculations to determine if they are subject to the kiddie tax. See Who Must File in the instructions for Form 8615 and the tax topic below: http://www.irs.gov/pub/irs-pdf/i8615.pdf http://www.irs.gov/taxtopics/tc553.html Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted February 10, 2014 Report Share Posted February 10, 2014 Would the child then be subject to the Kiddie tax? Kiddie tax is based on age and income and maybe some other things, but not dependency status. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 10, 2014 Report Share Posted February 10, 2014 My high earners can usually claim their children as dependents in spite of trusts, scholarships, etc., as they still spend a lot of money on their children: family vacations, spring break trips, apartments while at college, cars, car insurance, McMansion while at home, designer clothes and handbags and shoes, other toys like expensive electronics, pool tables, etc, summer in Europe, Daddy's credit card, and on and on. We run the support calculations. And, yes, kiddie tax gets triggered by all those investments grandma and grandpa gave them when they were born. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted February 10, 2014 Author Report Share Posted February 10, 2014 My high earners can usually claim their children as dependents in spite of trusts, scholarships, etc., as they still spend a lot of money on their children: family vacations, spring break trips, apartments while at college, cars, car insurance, McMansion while at home, designer clothes and handbags and shoes, other toys like expensive electronics, pool tables, etc, summer in Europe, Daddy's credit card, and on and on. We run the support calculations. And, yes, kiddie tax gets triggered by all those investments grandma and grandpa gave them when they were born. Lion: The trust will be paying all those expenses. The first son is 18, and moving out of state to college in September. The trust will have the cash to pay any and all living expenses of this son. The plan is also to have this son involved with the management and operation of the assets in the trust. That is why there would be a W-2 for $10k. Then the trust would pay other amounts for college, living expenses, etc on behalf of this son. According to Mr Pencil, even if the parents are NOT claiming the child, the child is still subject to the Kiddie tax till age 24? Rich Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 10, 2014 Report Share Posted February 10, 2014 Rich, will the unearned income of this 18 year old child exceed $2,000? If so, please see the following taken from the Form 8615 instructions, and you'll see why I said you need to run the support test. Who Must File Form 8615 must be filed for any child who meets ALL of the following conditions. 1. The child had more than $2,000 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 2013,b. Was age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or c. Was over age 18 and under age 24 at the end of 2013, was a full-time student, and did not 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 2013. 5. The child does not file a joint return for 2013. Support. Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child's support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student. For details, see Pub. 501, Exemptions, Standard Deduction, and Filing Information. Certain January 1 birthdays. Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under Who Must File. IF a child was born on... THEN, at the end of 2013, the child is considered to be... January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. ***Do not use Form 8615 for this child. The parent may be able to elect to report the child's interest, ordinary dividends, and capital gain distributions on the parent's return. If the parent makes this election, the child will not have to file a return or Form 8615. However, the federal income tax on the child's income, including qualified dividends and capital gain distributions, may be higher if this election is made. For more details, see Form 8814, Parents' Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 10, 2014 Report Share Posted February 10, 2014 Exactly. When my guy who earns $500,000 (or 1,200,000) spends $100,000 on each family member per the support worksheet and invests the rest, and grandma's trust fund has income of only $50,000 to pay the student's tuition, room & board, and spending money, student is not paying over half his only support -- and his Earned Income is very definitely not more than half his support. So, (none of those high earners have come in yet this season) parents are eligible to claim their child and Kiddie Tax applies. But, you have to run the support worksheets for each case. 1 Quote Link to comment Share on other sites More sharing options...
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