Filing requirements

[Corduroy Frog]

Parents have a stockbrokerage account for 10-year old daughter.

Dividends were minimal ($200), However one of the securities sold for $7000.  The gain on the sale was $500.

The "taxable income" (before std deduction) from all this is only $700.

However, the "Gross Income" well exceeds the filing requirement.

Is the daughter required to file? TTB only states "income."  Depends on the definition of "income" I would think.

 

[kathyc2]

9 hours ago, Corduroy Frog said:

Depends on the definition of "income" I would think.

Definition of gross income:  https://www.law.cornell.edu/uscode/text/26/61

[Corduroy Frog]

Thank you.  Item 3 on the link defines the "gain" and not the "selling price."

[BulldogTom]

I would file the return for the child.   IRS is not good at picking up cost basis on stock sales.   I think we have all seen the letter from the IRS with gross proceeds and no basis added to a return when a client "forgot" to tell us about stock trades that produced no income or a loss.

IMHO, you will be doing the clients a favor by filing the return.  You may be dealing with a letter in a year or so if you don't.   And it may come back as a letter to the parents on why they did not include the gross income as kiddie tax on the parents return.

I would also only charge a very minimal fee for filing the return and add it to the parents invoice.   But that is just me.

Tom
Longview, TX

[TexTaxToo]

4 minutes ago, BulldogTom said:

And it may come back as a letter to the parents on why they did not include the gross income as kiddie tax on the parents return.

Kiddie tax, if it applies (it would not in this case), would go on the child's return.  The parents may elect to include the child's taxable interest and dividends on their return, but not capital gains.

On the facts presented, there is no filing requirement, but Tom is right that filing could prevent a letter, especially if basis was not reported to the IRS for the stock sale.

17 minutes ago, BulldogTom said:

I would also only charge a very minimal fee for filing the return and add it to the parents invoice.   But that is just me.

[mcb39]

Everyone needs from time to time to refresh their knowledge about the kiddie tax.  Clients have never heard of it and occasionally try to shift income to their minor children to avoid taxation.  Tough scenarios to explain and/or calculate.

[Lion EA]

I do about what Tom does, file a return for the child. I too have seen IRS letters based on Proceeds, even though the major brokerage reported Basis to the IRS. It's so much faster and easier to file the return for a child than to respond to an IRS letter.

Filing for children (and the elderly) also can prevent ID theft, or in one case with a client, uncover ID theft early.

Even though if it's only interest/dividends and can go on the parents' return, it has saved my clients a bit when reported on the child's return.

Years ago in my HRB days, we got an IRS letter looking for a child's return when the interest had been reported on the parents' return where the child was a dependent. Time-consuming to deal with. And, unhappy clients getting an IRS letter!

I charge a flat amount for children, sometimes separately and sometimes on the parents' invoice.

[Sara EA]

They got a letter even with basis reported?  Are you sure?  That defeats the whole purpose of the reporting mandate.

[Lion EA]

Yes, annoying. Can't remember the client now, so it may've been one of those brokerages that doesn't send consolidated 1099s until March and then sends corrected forms in April or later. I guess I can see how the CP letters go out before all the underlying forms are entered into the tax payer's account. But, still annoying. And, the client thinks we did something wrong!

[Randall]

And remember if there are capital losses, you can carry them forward each year.  Give a them the worksheet and let them know to retain them for future years.

[kathyc2]

5 hours ago, Randall said:

And remember if there are capital losses, you can carry them forward each year.  Give a them the worksheet and let them know to retain them for future years.

I have an elderly couple with a carryforward.  Their income is too low to ever use it so it keeps carrying forward.  State income starts with federal AGI, so they get the state benefit of the same 3K year after year. 

[mcb39]

Wisconsin only allows $500 per year.  I have a client who will never use up the Federal $3000, let alone the WI deduction., even though they have enough taxable income to take the deduction going forward.

[Sara EA]

The capital loss carryover of $3k has not been increased since 1978.  According the Congressional Research Service, it would be about $13k if adjusted for inflation.

[Corduroy Frog]

Tom, you make sense.  I'm going to file the girls return for free with explanation, as her parents have paid me handsomely.

[Randall]

Another twist on this.  Adult.  Gross proceeds over the limit but no taxable income.  Code C reported so should a return be filed?  And it's a new client, there was no extension filed.  So it will be late.  No tax due.  But Gross proceeds $250,000.  Basis same, matured CD inside a brokerage account.

[mcb39]

On 2/23/2024 at 11:32 AM, mcb39 said:

Wisconsin only allows $500 per year.  I have a client who will never use up the Federal $3000, let alone the WI deduction., even though they have enough taxable income to take the deduction going forward.

Wisconsin changed their law for 2023 and in now allowing the $3000 deduction; the same as Federal.

[jklcpa]

7 hours ago, Randall said:

Another twist on this.  Adult.  Gross proceeds over the limit but no taxable income.  Code C reported so should a return be filed?  And it's a new client, there was no extension filed.  So it will be late.  No tax due.  But Gross proceeds $250,000.  Basis same, matured CD inside a brokerage account.

In determining gross income for the filing requirement, gains but not losses are used in that determination.  It is not the proceeds, but the gain that is taken into consideration.  That being said, even when the basis is reported to IRS and no gain exists, the AUR will be using the sale side only and this new client may receive a CP2000 in about 18 months.

You should explain the filing requirement to the client, and personally I'd advise this client to file a return to avoid the notice.  Even without an extension, there shouldn't be any penalties assessed since no tax is due and the client doesn't actually have a filing requirement.  If penalties are assessed, those should be easily explained and abatement requested. Filing also establishes the statute of limitations date in the event that you are missing some piece of income from this new the client.

What about a state filing requirement?

[Randall]

Thanks Judy.  That was my thinking too.  I'll advise the client so and probably file.  She was advised by the broker rep that she may have to file and pay some tax.

[Medlin Software, Dennis]

14 hours ago, jklcpa said:

Filing also establishes the statute of limitations date in the event that you are missing some piece of income from this new the client.

This is a great reminder that many should be filing, even if no requirement. We have been doing so for quite some time for our disabled daughter, for this very reason (sets the clock). She does a small amount of paid work for me each year, so her income is <$500.  Once she is no longer subject to means testing, she will hopefully have assets and income which will trigger required filing, so we want to prevent look back issues once her first "major" return gets filed.