UTMA: Trying to Make it Hassle-Free

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oneleaf
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UTMA: Trying to Make it Hassle-Free

Post by oneleaf » Tue Nov 07, 2017 1:18 am

My daughter occasionally gets cash gifts, and I am interested in putting them in a UTMA account for her. I wanted to make sure I understood all the implications of having a custodial account for her. This was my plan:

1. My understanding is my daughter does not need to file a tax return if the investment income is under $1050. This is my biggest goal. I understand she can make more than that and still pay no taxes, but my goal is that I keep the amount small enough such that no return needs to be filed.

2. Since this is a new account, all shares of any mutual funds/ETF's will be covered (basis reported). So if I sell a fund for, say, $5000 with a basis of $4500, the IRS should know from the 1099-B that there is only $500 capital gains, right? I understand this can be an issue for older accounts, where someone sells shares with no basis reported, so even a $1100 sale could trigger an audit by the IRS requesting a tax return be filed (since they could assume the basis would be $0). I am hoping that with a new account, with covered shares only, that I have better control over this situation?

3. And as long as I keep track of expected dividends, it would be prudent to continue selling shares to keep the basis as high as possible, while keeping the total income below $1050. Given the small account size, I am guessing this will be easy to do.

4. I understand this can affect need-based financial aid in the future, but I plan to keep the account pretty small. It'd start off with maybe $1k and we'd try to keep it well under $10k.

Are there any gotchas I should be concerned with, in regards to setting up a UTMA for such a small amount of money? Thanks for any advice!

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TomatoTomahto
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Re: UTMA: Trying to Make it Hassle-Free

Post by TomatoTomahto » Tue Nov 07, 2017 6:51 am

I don’t know if this counts as a gotcha, but the account becomes hers to do with as she pleases at either 18 or 21, depending on state.

sk2101
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Re: UTMA: Trying to Make it Hassle-Free

Post by sk2101 » Tue Nov 07, 2017 8:21 am

I would just put the money in a 529 account and not worry about tax implications.

mega317
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Re: UTMA: Trying to Make it Hassle-Free

Post by mega317 » Tue Nov 07, 2017 11:40 am

Sounds you're doing what I do. The final step in my plan is to spend it all before it can affect financial aid or become a lump sum payout to a teenager.

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MP123
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Re: UTMA: Trying to Make it Hassle-Free

Post by MP123 » Tue Nov 07, 2017 12:11 pm

Filing a return for her or including her on your return isn't very hard. I wouldn't set out to minimize any gains just to avoid that. That's sort of like the tail wagging the dog.

I would also consider a 529 as previously mentioned.

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verbose
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Re: UTMA: Trying to Make it Hassle-Free

Post by verbose » Tue Nov 07, 2017 1:13 pm

I had to start filing tax returns for my daughter’s UTMA in 2009. I moved her account to another custodian in early 2009 to align with other investment accounts and realized a large loss (it was 2009, remember). So I carried forward a long-term capital loss until there was a capital gain to offset it.

I became aware last year that her unrealized capital gains would put her in kiddie tax territory if the investments were all sold in the same year. So I have begun “capital gain harvesting” using the $1050 standard deduction plus the zero-rate capital gains area up to $2100 (above that is kiddie tax). I will do more this year. I also had to file a state income tax return because the gains exceeded $1050.

Taxes matter. None of her returns are hard. I do them by hand (but I like doing taxes, so go figure).

Spirit Rider
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Re: UTMA: Trying to Make it Hassle-Free

Post by Spirit Rider » Tue Nov 07, 2017 1:39 pm

I agree that you should not be artificially limiting your tax gain harvesting to the $1,050 limit. You should be going all the way to the $2,100 limit. The tax benefit is far greater than any trivial tax filing exercise.

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oneleaf
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Re: UTMA: Trying to Make it Hassle-Free

Post by oneleaf » Tue Nov 07, 2017 4:14 pm

Thanks for the responses! I already have a 529, and trying not to contribute too much to it.

This UTMA would be small enough that keeping gains under $1050 annually should be very easy, which is why I wanted to do that. But if the account ever grew, I agree I should not worry about doing a tax return for her.

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