Today TaxMama hears from Bill in the TaxQuips Forum, who is confused. “My 22 year old daughter won a contest (trip to NYC and new wardrobe) in 2010. She has received a 1099-MISC for $18,000 for the total of goods and services that she received. She is a full-time student and this is unearned income. I thought the kiddie tax applied to investment income but it looks like it may not be that straightforward. HR Block’s At Home tax program says that it is subject to the kiddie tax. Do I have to pay a kiddie tax on my tax return because of her new wardrobe and trip?”
Dear Bill,
What a wonderful thing for her to win! It must have been very exciting.
Rita Lewis, an Enrolled Agent in CT explains that you do not report your child’s unearned income on your tax return unless it consists of only interest, ordinary dividends, &/or capital gain distributions.
That’s odd about the H&R Block software. This is not a gray area. As Rita says, kiddie tax ONLY applies to dividend and investment income.
File a tax return for your daughter. Do not use her personal exemption, since she is your depdendent. Report this as OTHER income on line 21 of the long-form, Form 1040.
In fact, you may be able to reduce her potential taxes. If you can find proof that the real value of the prize is lower, include the proof and reduce the amount you report to the proof you have found. File the tax return on PAPER, not electronically. Do some digging. Even if you have to put her tax return on extension. Incidentally, if you do put it on extension, pay the tax you think she will owe, with the extension. Pay the difference, if you can’t find proof, when you file the return.
And remember, you can find answers to all kinds of questions about prizes, kiddie taxes, and other tax issues, free. Where? Where else? At www.TaxMama.com.
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