Nate, a 17 year old dependent of his parents, earns $4,000 working as a busboy and $3,000 of short-term capital gains from the sale of HOOD stock. What portion of Nate’s income is taxed at his parents’ rate?
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Question

BlackTom AI · Accepted Answer

First, separate Nate’s total income into earned and unearned components as these are taxed differently. Nate has $4,000 of earned income (busboy wages) and $3,000 of unearned income (short-term capital gains).

Next, apply the Kiddie Tax framework, which determines how a dependent child’s unearned income is taxed. Under this rule, unearned income (such as capital gains) is taxed at the parents’ marginal tax rate rather than the child’s rate. In contrast, earned income is taxed at the child’s own rate, subject to standard deduction rules for dependents.

Because the question asks for the portion of Nate’s income taxed at his parents’ rate, focus on the unearned portion: the $3,000 of short-term capital gains. Since these are unearned and Nate is a dependent, this $3,000 amount falls under the parental tax rate regime rather than Nate’s own rate.

Therefore, the portion of Nate’s income taxed at his parents’ rate is the full $3,000 unearned income. The earned income ($4,000) would be taxed at Nate’s own rate, not his parents’ rate, and is not included in the amount taxed at the parents’ rate.

In summary: earned income goes to Nate’s rate, unearned income goes to parents’ rate, and the unearned portion here is $3,000, which is why the expected numeric answer is 3000.

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