Filing status is something that determines the tax return forms a taxpayer must use when filing their taxes and is tied to the taxpayer’s marital status. Filing status is determined by your filing requirements, standard deductions, eligibility for certain credits, and your correct tax. This is an important part of your tax return because it helps to determine the tax bracket and the amount that must be paid. There are many different things that define filing your status, to name a few, your marital status, the number of children you have, occupation, and many other factors. There are five filing status categories, and they are as follows: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent children.

What is “Single” filing status?

A single filer is a taxpayer that is unmarried, divorced, a registered domestic partner, or legally separated according to state law as of the last day of the tax year. Single filers have lower income limits for most exemptions. See below for the 2022 and 2023 tax brackets for single filers:

Federal Income Tax Rate	Income Range for Single Taxpayer for 2022	Income Range for Single Taxpayer for 2023
10%	$0-$10,275	$0-$11,000
12%	$10,276-$41,775	$11,001-$44,725
22%	$41,776-$89,075	$44,726-95,375
24%	$89,076-$170,050	$95,376-$182,100
32%	$170,051-$215,950	$182,101- $231,250
35%	$215,951-$539,900	$231,251 – $578,125
37%	Over $539,900	Over $578,125
Standard Deduction	$12,950	$13,850

A single filing status can also be considered if you are still married if you lived separately from your spouse for the last six months of the tax year and paid more than half the cost of keeping up a house for yourself and a qualifying dependent or child. 

What is “Married Person Filing Jointly or Surviving Spouse” filing status?

A married person filing jointly or surviving spouse is defined as an individual that is married by the end of the tax year and can file a tax return jointly with their spouse. When you use the married filing jointly status, couples record their respective incomes, exemptions, and deductions on the same tax return which usually provides a bigger tax refund or a lower tax liability. See below for the 2022 and 2023 tax brackets for married filing jointly filers:

Federal Income Tax Rate	Income Range for Taxpayer who is Married Filing Jointly in 2022	Income Range for Taxpayers Who Are Married Filing Jointly in 2023
10%	$0-$20,550	$0-$22,000
12%	$20,551-$83,550	$22,001-$89,450
22%	$83,551-$178,150	$89,451-$190,750
24%	$178,151-$340,100	$190,751-$364,200
32%	$340,101-$431,900	$364,201-$462,500
35%	$431,901-$647,850	$462,500-$693,750
37%	Over $647,850	Over $693,751
Standard Deduction	$25,900	$27,700

Married filing jointly is usually best if only one spouse has a significant income, but if both taxpayers work and the income and itemized deductions are large and very unequal there may be more of an advantage to file separately. 

What is “Head of Household” filing status?

Head of household is a single or unmarried taxpayer that pays at least 50% if the costs of supporting their household and lives with other qualifying family members that they provide support for more than half the year. This includes more than half of the total household bills, as well as rent or mortgage, utility bills, insurance, property taxes, groceries, repairs, and other common household expenses. See below for the 2022 and 2023 tax brackets for head of household filers:

Federal Income Tax Rate	Income Range for Taxpayer filing as the Head of Household for 2022	Income Range for Taxpayer filing as Head of Household for 2023
10%	$0-$14,650	$0-$15,700
12%	$14,651-$55,900	$15,701-$59,850
22%	$55,901-$89,050	$59,851-$95,350
24%	$89,051-$170,050	$95,351-$182,100
32%	$170,051-$215,950	$182,101-$231,250
35%	$215,951-$539,900	$$231,251-$578,100
37%	Over $539,900	Over $578,101
Standard Deduction	$19,400	$20,800

What is a Qualifying family member?

A qualifying family member is a dependent child, grandchild, sibling, grandparent, or anyone else you can claim as an exemption. This can be defined as a member of the household is a dependent relative or non-relative that resided in a taxpayer’s domicile. To be an eligible member of the household, certain qualifications must be met. A qualifying family member is someone that is not your qualifying child and must be related to you. They also must have lived with you all year as a member of your household, have gross income for the year less than $4,400, and you must have provided more than half of the person’s total support for the year.

What is “Qualifying Widow(er) with Dependent Child” filing status?

In the event that a spouse dies during the tax year, the surviving spouse can use a joint filing status. For the two years following the year of a spouse’s death, the surviving spouse can file as a qualifying surviving spouse. This allows the surviving spouse to maintain the standard deduction for a married couple filing jointly for two years after the spouse’s death. The taxpayer cannot remarry for two years and must claim a qualifying dependent. 

What are the dependent requirements?

To be qualified as a dependent, there are a number of tests to be met. The dependent must meet the relationship test, so they must be your son, daughter, stepchild, foster child, or a descendant (grandchild), brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them (niece or nephew). The child must meet the following requirements be under age 19 at the end of the year and younger than the taxpayer, a student under age 24 at the end of the year and younger than the taxpayer, permanently and totally disabled at any time during the year regardless of age. The child also must have lived with you for more than half of the year, not provided more than half of their own support for the year and must not be filing a joint return for the year.

What is considered total support to claim a dependent?

Total support is defined as more than half of a person’s total support for the entire tax year. This can include food, clothing, shelter, education, medical and dental care, recreation, and transportation. 

How does claiming a dependent benefit you?

By claiming a dependent there are certain deductions that help to lower your taxable income. For 2022 there is a child tax credit which can reduce your taxes by $2,000 per qualifying child age 16 or younger. Once your child is over the age of 16 you can receive an additional credit up to $500 which is the credit for other dependents. There is also another tax credit if your child is pursuing a degree at a school, you have the ability to receive the American Opportunity Credit which can save up to $2,500 in tax for education expense per each eligible student.  Similar to the American Opportunity Credit there is a Lifetime Learning Credit if you are not eligible for the American Opportunity Credit. The Lifetime Learning Credit is a credit for up to $2,000 per tax year but starts phasing out when your modified adjusted gross income exceeds $80,000 for single filers and $160,000 for married filing jointly filers. This is a non-refundable credit and is calculated by taking 20% of up to the first $10,000 in qualified education expenses for qualifying students. You can also receive a student loan interest deduction for any of your dependents of up to $2,500 for qualifying student loan interest paid.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about tax planning strategies, please do not hesitate to contact us at Lear & Pannepacker.

The kiddie tax is a US tax provision passed to discourage parents from giving their children unearned income to avoid paying higher tax rates. The Kiddie Tax’s age range and prerequisites are as follows:

Age Group: Children who fall under the age ranges listed below are subject to the Kiddie Tax:

• 17 years old or younger at the conclusion of the tax year, as support obligations do not apply to those under the age of 18.
• 18 years of age at the conclusion of the tax year, but only if their earned income is 50% or less of their “support.”
• 19–23 years old if their earned income is less than or equal to half of their “support” and they are a full-time student.

According to the kiddie tax regulations, “support” covers items such as food, clothes, shelter, healthcare, and education. Whether a child’s unearned income is liable to be affected depends on the total amount of support provided by a parent for a child between the ages of 18 and 23. For children under 18, the support needs are irrelevant. The unearned income a child receives, such as interest, dividends, capital gains, rent, and royalties, is subject to the kiddie tax. Crucially, the kiddie tax is not applied to any wages or salaries (earned income) that the child receives. Three income thresholds—$0 to $1,250, $1,250 to $2,500, and $2,500 and above—are used to determine the tax treatment. We shall examine these thresholds and the corresponding tax treatment below. 

The kiddie tax does not apply to children who:

• had no living parents as of the end of the tax year
• were married and filed a joint tax return for the year
• are not required to file a tax return for the tax year

Tax-Free Income for Children: Exploring the First Threshold of the Kiddie Tax

The first $1,150 of unearned income is covered by the kiddie tax’s standard deduction. This provision ensures that a portion of a child’s unearned income remains tax-free, providing some relief for children with minimal unearned income.

The standard deduction is a predetermined amount set forth by the Internal Revenue Service (IRS) that reduces the taxable income of individuals. For children subject to the kiddie tax, this standard deduction applies specifically to their unearned income, such as interest, dividends, and capital gains.

The standard deduction essentially shields the first $1,150 of a child’s unearned income from taxation in the context of the kiddie tax. Therefore, if a child’s unearned income is below this limit, they are exempt from paying federal income tax on that sum of money.

The presence of the standard deduction enables children to earn a minimal amount of money without having to pay taxes on it. It tries to promote children’s financial development without putting a heavy tax load on them while acknowledging that youngsters frequently have limited sources of income.

Kiddie Tax and Parental Income: How the Second Threshold Affects Tax Liability

The next $1,150 of unearned income, following the Kiddie Tax’s standard deduction, is subject to taxation at the child’s marginal tax rate. The marginal tax rate refers to the tax rate applied to the last dollar earned, reflecting the progressive nature of the U.S. tax system.

The idea of fairness in the US tax system is acknowledged by taxing this share of the child’s income at their marginal tax rate. The tax treatment is in line with the progressive nature of income taxes, where higher income levels are subject to higher tax rates, by using the child’s marginal tax rate.

The total income of the child, which includes both earned and unearned income, determines the marginal tax rate for that child. Earned income for the child, such as wages or salary, is taxed at ordinary income tax rates, just like for adults. However, the child’s marginal tax rate only applies to the percentage of their income that is unearned and falls inside this threshold.

It’s crucial to keep in mind that the marginal tax rate for the child may change depending on their overall income. With a rise in income, the child may enter a higher tax bracket, which would mean a higher marginal tax rate for every dollar earned.

Families may precisely calculate their tax responsibilities and make appropriate plans when they are aware of how the next $1,150 in unearned income will be taxed at the child’s marginal tax rate. It also emphasizes the significance of taking into account the total amount of income, including both earned and unearned income, in order to determine the proper tax treatment for each component.

Kiddie Tax Beyond $2,500: Navigating Tax Treatment for Higher Unearned Income

Anything exceeding $2,500 for 2023 (up from $2,300 for 2022) will be taxed at the parent’s rate rather than the child, who typically pays a lesser rate. The amount over $2,500 that a child receives in unearned income is taxed at the parent’s marginal tax rate. Because of this, the parent may owe more in taxes than they would have if the child’s income had been taxed separately because the child’s unearned income will be taxed at the same rate as the parent’s other income.

To deter parents from giving assets to their children with the intention of benefiting from their lower tax band, the extra unearned income is taxed at the parent’s marginal tax rate. The tax code tries to maintain equity in the allocation of tax liabilities and avoid income shifting techniques by applying the parent’s tax rate to the child’s income.

While this may result in a higher tax bill for the parents, it’s important to note that the kiddie tax rules are specifically designed to address potential tax avoidance scenarios. Taxing the child’s unearned income at the parent’s rate helps ensure that families cannot exploit lower tax brackets by shifting income to their children.

However, if the child’s unearned income falls below the threshold, it will be taxed at the child’s lower tax rate. This recognizes that children typically have limited income sources and allows for a more reasonable tax treatment based on their individual circumstances.

It’s worth mentioning that the parent’s other income, such as their earned income or income from investments, will continue to be taxed at their respective rates. Only the excess unearned income of the child above the threshold is subject to taxation at the parent’s rate.

Marginal Tax Rate 

A marginal tax rate is the percentage of tax applied to an additional dollar of income. It represents the rate at which the last earned dollar is taxed. Marginal tax rates are based on the progressive nature of income tax systems, where higher income levels are subject to higher tax rates. Understanding marginal tax rates helps individuals and businesses assess the impact of earning additional income and make informed financial decisions.

529 Plans 

A tax-advantaged savings plan called a 529 is created to encourage people to put money down for their children’s future educational costs. It takes its name from Internal Revenue Code Section 529, which outlines the details for these kinds of programs. The plan enables individuals, usually parents or guardians, to make financial contributions to an account set up for the purpose of covering eligible educational costs.

An important benefit of a 529 plan is that, as long as the withdrawals are used for approved school costs, the investment returns grow tax-free, meaning they are not subject to federal income tax. For accredited educational institutions, qualified expenses often include tuition, fees, books, supplies, and certain room and board charges.

Income from a 529 plan is usually exempt from the kiddie tax when it comes to taxes. Interest, dividends, and capital gains are examples of unearned income that is subject to the kiddie tax. The kiddie tax is not applied to withdrawals from a 529 plan that are spent for eligible school costs because they are classified as taxable and hence not unearned income.

This exception acknowledges the goal of 529 plans, which is to help families save money for college costs and give them a tax-advantaged vehicle to do so. It encourages families to use these plans to save and invest for educational reasons without being subject to additional tax penalties by removing income from a 529 plan from the Kiddie Tax. It’s crucial to remember that distributions from a 529 plan may be subject to income tax and a 10% penalty on the earnings component if they are utilized for non-qualified purposes.

For additional questions, don’t hesitate to reach out to our accounting professionals at Lear & Pannepacker.