Kiddie Tax Optimization

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boglebrain
Posts: 99
Joined: Sat Mar 15, 2014 9:55 am

Kiddie Tax Optimization

Post by boglebrain » Sat Dec 16, 2017 6:42 pm

I opened an UTMA account for my child this year mid-year. It will generate about $400 in dividends (80-90% are qualified) and it has unrealized gains of about $2000. I'm trying to understand what is the optimal strategy from a tax perspective. I've read through the wiki page on the kiddie tax.

My initial thought is to tax-gain harvest about $650 worth of short-term capital gains. This is because the first $1050 in income is not taxed. While the tax rate on the next $1050 is at 10% for STCG and interest it may be better to wait until next year and tax-gain harvest when the funds become LTCG. Of course if they continue to grow I may be playing catch up but perhaps better to not pay the tax now. Thoughts?

Here are the options as I see it:
Option 1:
Do nothing now. No need to file anything even since the unearned income is below $1050.

Option 2:
Tax-gain harvest $650 so that total income is $1050. Perhaps no need to file if income is just under $1050.

Option 3:
Tax-gain harvest $1700. I ran it through TurboTax and it gives federal tax of $71 and state tax of $10. This amount seems small and I can move the goal post forward.

Option 4:
Wait until gains are LTCG. When I simulate this federal tax is $0 as expected and state tax is still $10.

This is probably a super-minor optimization but wanted to see if others have thought about this.

livesoft
Posts: 62716
Joined: Thu Mar 01, 2007 8:00 pm

Re: Kiddie Tax Optimization

Post by livesoft » Sat Dec 16, 2017 7:02 pm

I guess you didn't fund the UTMA with gifts of shares already held long-term. If you had, they could've been tax-gain harvested with no short-term holdings.

You can still gift shares held long-term in the next week or so for 2017 and do the tax-gain harvesting with ALL long-term shares. Don't harvest shares with short-term gains. Those can wait.
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boglebrain
Posts: 99
Joined: Sat Mar 15, 2014 9:55 am

Re: Kiddie Tax Optimization

Post by boglebrain » Sat Dec 16, 2017 10:10 pm

Yeah I realize that was a mistake. I’ll get the right next time. Thanks for pointer.

Finridge
Posts: 498
Joined: Mon May 16, 2011 7:27 pm

Re: Kiddie Tax Optimization

Post by Finridge » Sat Dec 16, 2017 10:49 pm

livesoft wrote:
Sat Dec 16, 2017 7:02 pm
I guess you didn't fund the UTMA with gifts of shares already held long-term. If you had, they could've been tax-gain harvested with no short-term holdings.
Is it possible to do this with mutual fund "shares"?

livesoft
Posts: 62716
Joined: Thu Mar 01, 2007 8:00 pm

Re: Kiddie Tax Optimization

Post by livesoft » Sun Dec 17, 2017 4:25 am

Yes, definitely. I gave my son shares of Vanguard Large-Cap Index fund shares. He immediately sold them for a gain and paid no tax on the gain.
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