MODULE 5: Additional taxes ( kiddie tax, NIIT, Additional Medicare Tax)

Kiddie Tax Overview

• Definition: The Kiddie Tax applies to dependent children with unearned income exceeding $2,600.

• Tax Rate: Taxed at the parent's marginal tax rate instead of the child's.

Steps for Calculating Kiddie Tax

Step A: Calculate Taxable Income

• Use the individual income tax formula.

• Special Standard Deduction Rules for dependents:

  • Standard deduction is the greater of $1,300 or earned income + $4.50.

Step B: Calculate Net Unearned Income

• Net Unearned Income = Unearned Income - $2,600

• Types of Income:

  • Earned Income: Wages, self-employment income (active income).

  • Unearned Income: Interest income, dividends, capital gains (passive income).

Step C: Apply Tax Rates

• Tax net unearned income at the parent's marginal tax rate.

• Remaining taxable income taxed at the dependent's tax rate (10% for the first $11,600 in 2024).

Final Calculation

• Add taxes calculated in Steps B and C to find total federal income tax liability.

Example Calculation: Malik's Tax Liability

• Details:

  • Age: 17

  • Earned Wages: $4,000

  • Unearned Investment Income: $3,500

  • Parents’ Marginal Tax Rate: 35%

Calculation Steps

1. Calculate Total Income:

   • Total Income = Earned Income + Unearned Income = $4,000 + $3,500 = $7,500

2. Adjusted Gross Income (AGI):

   • No exclusions or adjustments, AGI = Total Income = $7,500.

3. Determine Standard Deduction:

   • Greater of $1,300 or $4,000 + $4.50 = $4,450. Use $4,450.

4. Calculate Taxable Income:

   • Taxable Income = AGI - Standard Deduction = $7,500 - $4,450 = $3,050.

5. Calculate Net Unearned Income:

   • Net Unearned Income = $3,500 - $2,600 = $900.

6. Step B - Tax Net Unearned Income:

   • Tax on Net Unearned Income: $900 * 35% = $315.

7. Step C - Tax Remaining Income:

   • Remaining Taxable Income = $3,050 - $900 = $2,150.

   • Tax on Remaining Income: $2,150 * 10% = $215.

8. Total Tax Liability:

   • Total = $315 + $215 = $530.

Special Consideration

• If unearned income is less than or equal to $2,600, Kiddie Tax does not apply; tax is calculated at the child’s tax rate.

Additional Taxes

Additional Medicare Tax

• Rate: 0.9% on wages exceeding $200,000 (unmarried) or $250,000 (married filing jointly).

Net Investment Income Tax

• Rate: 3.8%, applies to the lesser of net investment income or modified AGI exceeding thresholds ($200,000 for unmarried, $250,000 for married).

Example Calculation for FAM

• Details:

  • Wages: $208,000

  • Net Investment Income: $140,000

  • AGI: $348,000

Additional Medicare Tax Calculation

1. Tax only applies to wages above $200,000:

   • Excess Wages: $208,000 - $200,000 = $8,000.

   • Additional Medicare Tax: $8,000 * 0.9% = $72.

Net Investment Income Tax Calculation

1. Compare net investment income vs AGI over $200,000:

   • Excess AGI: $348,000 - $200,000 = $148,000.

   • Use lesser amount ($140,000).

   • Net Investment Income Tax: $140,000 * 3.8% = $5,320.