D is corrent. The requirement is to determine the amount of a 5-year old child’s income that will be taxed at the parents’ tax rate. The earned income of a child of any age and the unearned income of a child 18 years or older as of the end of the tax year is taxed at the child’s own tax rates. However, the unearned income of a child under age 18 in excess of a threshold amount is generally taxed at the rates of the child’s parents. The threshold amount is subject to change because it is indexed for inflation, but it is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income. Since the multiple-choice item assumes the applicable standard deduction for the child is $950, the applicable threshold would be $950 x 2 = $1,900. As a result, $3,000 interest income - $1,900 threshold = $1,100 of the child’s interest income would be taxed using the rates of the child’s parents.
A is incorrect because unearned income in excess of $1,900 will be taxed at the parents’ rates.
B is incorrect because unearned income in excess of $1,900 will be taxed at the parents’ rates.
A is incorrect because unearned income in excess of $1,900 will be taxed at the parents’ rates.
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