How much of a dependent child's unearned income of $3,500 is subject to the Kiddie Tax?

The correct answer is determined by understanding how the Kiddie Tax applies to a dependent child's unearned income. For tax purposes, the Kiddie Tax is designed to tax children's unearned income at the parents' tax rates, but only once the child's income exceeds a specified threshold.

For the tax year 2023, the first $1,250 of unearned income is generally tax-free for children. The next $1,250 (from $1,251 to $2,500) is taxed at the child's rate, but earnings beyond that amount are subject to the higher tax rates that apply to the parents.

In this case, with a dependent child having unearned income of $3,500, the first $1,250 is not subject to the Kiddie Tax, and the next $1,250 is taxed at the child's tax rate. Thus, $2,500 is accounted for, leaving $1,000 beyond that which becomes subject to the parents' tax rates. Therefore, the amount that is subject to the Kiddie Tax is $3,500 minus the $2,500, which results in $1,000.

This understanding of the thresholds for unearned income is essential for determining how much income is taxed