AOTC and Kiddie Tax for 2019 and 2020

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986racer
Posts: 158
Joined: Thu Aug 11, 2016 10:09 am

AOTC and Kiddie Tax for 2019 and 2020

Post by 986racer »

I'm working on the 2019 taxes for DD (who became a college freshman in August 2019) and I'm starting to plan for 2020. Can someone help verify the numbers here? The 2019 calculations that I did approximately match with what turbo tax is showing (not sure why it doesn't exactly match, but I think it may be due to some of the unearned income being interest income), so I think I'm good, but just want confirmation. Her W2 income is approximately 6K

For those who don't know, the American Opportunity Tax Credit (AOTC) is usually claimed by the parent. However, if your income is too high and you don't qualify, your child can claim it instead. There are a few caveats though. (edited some of the below based on comments)
  1. The child will be taxed on their unearned income at Kiddie tax rates. As part of TCJA, the kiddie tax rates were changed to the same as trust tax rates.
  2. As part of the SECURE act, the 2020 kiddie tax rates follow the same methodology as pre-TCJA (i.e., the kiddie tax is the same as the parent's marginal rate - I'm not sure of the threshold for NIIT though). Also, the SECURE act will let you adjust your filings for 2018 and 2019 to use the old methodology. With that being said, the math generally works better by using the TCJA methodology
  3. If you are taking advantage of this, the AOTC will not be refundable. So, you can only get a credit for any tax liabilities
  4. Due to 3, you really need unearned income to take advantage of this. If you have highly appreciated stock (ideally, a stock that has tripled), you will be in good shape to take advantage of this
  5. For the child to take the credit, you can not claim the child as a dependent. However, the child will check the box on the return saying that he/she is eligible to be taken as a dependent.
So, here is what I did for 2019. Gifted approximately $29K of stock to child with basis of about 10K. (Yes, I will fill out form 709 to split the gift between my spouse and me)

Code: Select all

Long Term Capital Gain        19400
Personal Exemption    	    -   350
First 1100 untaxed	    -  1100
Next 1100 taxed	at DD rate  -  1100
Total capital gains to tax    16850
-----------------------------------
0-2650     (taxed at   0%)        0
2650-12950 (taxed at  15%)     1545
12950-	   (taxed at  20%)      780
12750-	   (taxed at 3.8%)	156
Total Tax     	      	       2481
The total tax is under 2500, so she can almost fully benefit from AOTC but does not get the refund of $19. With kiddie tax being calculated at trust tax rates, I think a theoretical max of 19750 of capital gains would tie out to a $2500 tax liability.

Now... here is my calculation for 2020.
Marginal capital gains rate for me is 20%. So, 2500 / 0.2 = 12500. Add in the fact that the first 2200 is untaxed plus the 350 personal exemption, and this brings it to a total of 15050 of capital gains that would generate a tax liability of 2500. Does that sound correct?
Last edited by 986racer on Sun Jan 26, 2020 1:22 pm, edited 1 time in total.
Flora
Posts: 113
Joined: Sat Mar 26, 2016 6:19 am

Re: AOTC and Kiddie Tax for 2019 and 2020

Post by Flora »

To clarify - under the SECURE Act changes to the kiddie tax, you have the option to use the parents' marginal rate for 2019 instead of trust rates (and can amend 2018 to use parents' marginal rate as well).
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FiveK
Posts: 10323
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Re: AOTC and Kiddie Tax for 2019 and 2020

Post by FiveK »

986racer wrote: Sun Jan 26, 2020 10:23 amHowever, if your income is too high and you don't qualify, your child can claim it instead. There are a few caveats though.
One more caveat: you can't claim her as a dependent.
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