My mother passed away in June and left an annuity to her 5 grandchildren ages 10 and under. The annuity is an IRA so they each have to take distribution of it and pay taxe.

Does each grandchild file an individual return with this as their sole income for 2013?

Can they still be claimed on their parents returns as dependents. What rate are they taxed at?

How can I calculate what they will owe in taxes?

Can they take the standard deduction if they are claimed as dependents?

Thanks.

#1;(I'm so sorry for your loss. )It depends; as their parents’ dependents, as you said, as they have no any earned income, i.e, commission / wage/ salary or etc. as long as each child’s annual unearned income,i..e, payments from the annuity, private pensions and annuities, exceeds $950, then the child needs to file his/her return.

#2;Yes; as their parents’ dependents, they MUST file their returns as long as their unearned income,i.e., CG, interest income, retirement benefits, annuities, private pensions or etc, exceeds $950.


NOTE; new kiddie tax rule for 2013. FOR 2013, if a child's(<18YO) interest plus dividends plus other investment income total more than $2K, part of the child's income will be taxed at the parent's tax rate instead of the child's tax rate. The kiddie tax applies ONLY to unearned income a child receives from income-producing property (or investment property), such as cash, stocks, bonds, mutual funds, and real estate. It doesn't include income the child earned from a job or self-employment.SO UNLESS, a child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends, the child dependent’d not be subject to kiddie tax.

#3;A child pays no tax on the first $950 of unearned income and pays tax on the next $950 at his or her own (presumably 10%) tax rate.For example, a child receives annuity payments of $2,050, then he needs to pay tax on $1,100.$110;10%*$1,100.

#4;Yes; their std ded is $950 in the case above(As long as a dependent child’s unearned income is $950 or higher). As you know, as dependents, they can’t claim their personal exemptions.

I think I follow all of that. Let's say the IRA is $10000 how much tax would be owed?

then, as mentioned previously, assume that the child beneficiary (a dependent) receives an annuity of $10,000, then $10,000-$950(the child beneficiary's std deduction)=$9,050*10%=905.