HRS § 235-7.5 - Certain unearned income of minor children taxed as if parent's income

(a) In the case of any child to whom this section applies, the tax imposed by this chapter shall be equal to the greater of: (1) The tax imposed by section 235-51 without regard to this section, or (2) The sum of: (A) The tax which would be imposed by section 235-51 if the taxable income of such child for the taxable year were reduced by the net unearned income of such child, plus (B) Such child's share of allocable parental tax. (b) This section shall apply to any child for any taxable year if: (1) Such child has not attained age fourteen before the close of the taxable year, and (2) Either parent of such child is alive at the close of the taxable year. (c) For the purpose of this section: (1) The term "allocable parental tax" means the excess of: (A) The tax which would be imposed by section 235-51 on the parent's taxable income if such income included the net unearned income of all children of the parent to whom this section applies, over, (B) The tax imposed by section 235-51 on the parent without regard to this section. For purposes of subparagraph (A), net unearned income of all children of the parent shall not be taken into account in computing any exclusion, deduction, or credit of the parent. (2) A child's share of any allocable parental tax of a parent shall be equal to an amount which bears the same ratio to the total allocable parental tax as the child's net unearned income bears to the aggregate net unearned income of all children of such parent to whom this section applies. (3) Except as provided in rules, if the parent does not have the same taxable year as the child, the allocable parental tax shall be determined on the basis of the taxable year of the parent ending in the child's taxable year. (d) For purposes of this section: (1) The term "net unearned income" means the excess of: (A) The portion of the adjusted gross income for the taxable year which is not attributable to earned income as defined in the Internal Revenue Code, over, (B) The sum of: (i) The amount in effect for the taxable year under section 63(c)(5)(A) (relating to the limitation on standard deduction in the case of certain dependents) of the Internal Revenue Code as operative under section 235-2.4(a), plus (ii) The greater of the amount described in clause (i) or, if the child itemizes the child's deductions for the taxable year, the amount of the itemized deductions allowed by this chapter for the taxable year which are directly connected with the production of the portion of adjusted gross income referred to in subparagraph (A). (2) The amount of the net unearned income for any taxable year shall not exceed the individual's taxable income for such taxable year. (e) For purposes of this section, the parent whose taxable income shall be taken into account shall be: (1) In the case of parents who are not married (within the meaning of section 235-93), the custodial parent (within the meaning of section 152(e) (with respect to the support test in case of child of divorced parents, etc.) of the Internal Revenue Code) of the child, and (2) In the case of married individuals filing separately, the individual with the greater taxable income. (f) The parent of any child to whom this section applies for any taxable year shall provide the social security number of such parent to such child and such child shall include such parent's social security number on the child's return of tax imposed by this section for such taxable year. (g) Election to claim certain unearned income of child on parent's return. (1) If: (A) Any child to whom this section applies has gross income for the taxable year only from interest and dividends (including Alaska Permanent Fund dividends), (B) Such gross income is more than $500 and less than $5,000, (C) No estimated tax payments for such year are made in the name and social security number of such child, and no amount has been deducted and withheld under section 3406 (with respect to backup withholding) of the Internal Revenue Code, and (D) The parent of such child (as determined under subsection (e)) elects the application of paragraph (2), such child shall be treated (other than for purposes of this paragraph) as having no gross income for such year and shall not be required to file a return under this chapter. (2) In the case of a parent making the election under this subsection: (A) The gross income of each child to whom such election applies (to the extent the gross income of such child exceeds $1,000) shall be included in such parent's gross income for the taxable year, (B) The tax imposed by this section for such year with respect to such parent shall be the amount equal to the sum of: (i) The amount determined under section 235-51 after the application of subparagraph (A), plus (ii) For each such child, the lesser of $10 or two per cent of the excess of the gross income of such child over $500. (3) The director shall prescribe such rules as may be necessary or appropriate to carry out the purposes of this subsection. [L 1987, c 239, §1(3); am L 1989, c 13, §4; am L 1990, c 15, §2; am L 1991, c 54, §2; am L 2001, c 199, §3]