Selling Shares of UTMA Account

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indexonlyplease
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Selling Shares of UTMA Account

Post by indexonlyplease » Wed Jan 03, 2018 8:33 am

This year my 21 year old son will start selling $5500 of his UTMA Account and put the money into his Roth IRA. His account is at Vanguard.

He is a full time student with part time job. Makes enough to cover the Roth IRA. So, he is taking advantage of the low income bracket and will not have to pay capital gains.

I have invested into his UTMA since he was very young. He has around $40,000 in this account.

Question: does he need to tell Vanguard to sell the old shares first. Or is this something they do. I never kept track of purchase price. He will do this every year until money is gone.

Money is in two funds Vanguard Total Stock Market and Vanguard Total International Stock Market 75/25. His Roth IRA is Vanguard 2060 Fund.

Thanks in advance.

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 8:39 am

What is the Cost Basis Method set on the UTMA account? I suspect it is Average Cost. Average Cost forces that oldest shares are sold first, that is in a First-In, First-Out way.

So have him look at his account. I just had my son sell shares in his UTMA in 2017 to take advantage of tax-gain harvesting. He will sell the rest in 2018. His Cost Basis Method was Specific Id, but his account was not at Vanguard and his financial institution had good records going back 21 years, so the actual gains will be trivial to calculate and put on his tax return.
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dm200
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Re: Selling Shares of UTMA Account

Post by dm200 » Wed Jan 03, 2018 8:42 am

Depending on applicable state law/regulations, it may be that the UTMA is required to be turned over to him, since he is 21. It is, almost certainly, his money now and you should follow the law and regulations.

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 8:44 am

I think the OP and I already indicated that has happened. :) My son moved his first tranche of UTMA money to his Vanguard taxable account all by himself. :) He will also fill out his own tax return just like in the past because he knows that his parents aren't gonna do it for him.
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Re: Selling Shares of UTMA Account

Post by retiringwhen » Wed Jan 03, 2018 9:14 am

livesoft wrote:
Wed Jan 03, 2018 8:44 am
I think the OP and I already indicated that has happened. :) My son moved his first tranche of UTMA money to his Vanguard taxable account all by himself. :) He will also fill out his own tax return just like in the past because he knows that his parents aren't gonna do it for him.
Two points:

On the ownership question, the custodian and the child may need to actively address the account status to ensure ownership is as the OP suggested (if he has not already). I found that some accounts in some places such as my credit union, the UTMA accounts become joint accounts after maturity. At Vanguard, I believe it would advisable, if the OP did not verify, that the ownership of the account is clear. It sounds like his child's money will be there for a few years. Our family ran into an issue at another brokerage (UBS) where several UGMA accounts my FIL opened for grandchildren who were now in their mid-20s somehow were included in his estate when he died. Bottom line, do not assume that at age 21 the account magically changes ownership. (My quick research also shows that provisions on ownership and control vary from state to state so YMMV).

On costs per share, the Vanguard UGMA account I have for one of my sons (still in college and under 21) has full cost basis data included. I made a change in the investments about 2 years ago so all shares are covered and all detail is available in the account. I always configure our accounts as SpecID so again, YMMV.

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 9:17 am

^That's all true.

My son's UTMA was transferred to his name only by the custodian exactly on his 21st birthday. Shares were transferred in-kind to a new account designation and he got lots of mail about it. My son is moving his money out of the high-fee firm that his grandmother had it in to Vanguard.
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Re: Selling Shares of UTMA Account

Post by CyclingDuo » Wed Jan 03, 2018 9:28 am

indexonlyplease wrote:
Wed Jan 03, 2018 8:33 am
This year my 21 year old son will start selling $5500 of his UTMA Account and put the money into his Roth IRA. His account is at Vanguard.

He is a full time student with part time job. Makes enough to cover the Roth IRA. So, he is taking advantage of the low income bracket and will not have to pay capital gains.

I have invested into his UTMA since he was very young. He has around $40,000 in this account.

Question: does he need to tell Vanguard to sell the old shares first. Or is this something they do. I never kept track of purchase price. He will do this every year until money is gone.

Money is in two funds Vanguard Total Stock Market and Vanguard Total International Stock Market 75/25. His Roth IRA is Vanguard 2060 Fund.

Thanks in advance.
I would suggest that you make sure you move the entire UTMA into a new account in his name now that he is 21 first (no tax consequence for this), it just takes a phone call to get that all set up and in progress. Otherwise, if selling shares from within an UTMA to fund his Roth IRA means that the Kiddie Tax will have some of the capital gains taxed at your rate. No need to be paying more tax than need be.

Due to his low tax status at age 21 and working part-time as a student, he won't owe any capital gains.
Last edited by CyclingDuo on Wed Jan 03, 2018 9:31 am, edited 1 time in total.
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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 9:30 am

CyclingDuo wrote:
Wed Jan 03, 2018 9:28 am
I would suggest that you make sure you move the entire UTMA into a new account in his name now that he is 21 first (no tax consequence for this), it just takes a phone call to get that all set up and in progress. Otherwise, if selling shares from within an UTMA to fund his Roth IRA means that the Kiddie Tax will have some of the capital gains taxed at your rate. No need to be paying more tax than need be.
It won't matter if the investments are in a UTMA or his son's personal account when it comes to the Kiddie Tax rules.
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Re: Selling Shares of UTMA Account

Post by CyclingDuo » Wed Jan 03, 2018 9:33 am

livesoft wrote:
Wed Jan 03, 2018 9:30 am
It won't matter if the investments are in a UTMA or his son's personal account when it comes to the Kiddie Tax rules.
Edit: Ah, up to age 24 and student. Got it.
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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 9:35 am

Kiddie Tax applies no matter what kind of taxable account the investment is held in as long as the age and dependency criteria are met. Yes, if age and dependency requirements are met, then there is the income stuff, too.

And for 2018, it is no longer the parents' tax rate because the law was changed.

One might say that with UTMA / UGMA accounts that if custodians do not do tax-free tax-gain harvesting every year, then it is possible they are failing in their fiduciary duty.
Last edited by livesoft on Wed Jan 03, 2018 9:39 am, edited 1 time in total.
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Re: Selling Shares of UTMA Account

Post by CyclingDuo » Wed Jan 03, 2018 9:38 am

livesoft wrote:
Wed Jan 03, 2018 9:35 am
Kiddie Tax applies no matter what kind of account the investment is held in as long as the age and dependency criteria are met. Yes, if age and dependency requirements are met, then there is the income stuff, too.
Got it. Still under age 24 and not providing more than 1/2 of his own support/income for school means he is still under the Kiddie Tax.

My bad.

In that case, I would probably fund his Roth IRA with new money. This would avoid any cap gains tax and let the taxable grow on its own to avoid all tax outside of dividends/cap gain distributions until he is beyond the age limit at 24 and out of school. At that point, he could probably take advantage of moving the money each year into his Roth IRA while he is still most likely under the income threshold to have to pay capital gains. And even if his income started to ramp up, his cap gains would still most likely be lower than Mom and Dad's rate.
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Re: Selling Shares of UTMA Account

Post by retiringwhen » Wed Jan 03, 2018 10:07 am

livesoft wrote:
Wed Jan 03, 2018 9:35 am
One might say that with UTMA / UGMA accounts that if custodians do not do tax-free tax-gain harvesting every year, then it is possible they are failing in their fiduciary duty.
Don't ask my why I agree, ugh. Paying the price this year (part of the multi-generational mess referenced above). I would love to rewind the clock about 8 years.

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Re: Selling Shares of UTMA Account

Post by CyclingDuo » Wed Jan 03, 2018 10:57 am

livesoft wrote:
Wed Jan 03, 2018 9:35 am
And for 2018, it is no longer the parents' tax rate because the law was changed.
Ah. I haven't looked at the new rules with regard to that since our two children's UTMA's were converted to them a year ago.
livesoft wrote:
Wed Jan 03, 2018 9:35 am
One might say that with UTMA / UGMA accounts that if custodians do not do tax-free tax-gain harvesting every year, then it is possible they are failing in their fiduciary duty.
Or the custodians could fail to the point that the UTMA portfolio grows so well and are throwing off enough unearned income that college and all expenses are totally paid for, and the kids end up with no debt as well as a nice portfolio of their own to launch into their careers and life. :mrgreen:
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Re: Selling Shares of UTMA Account

Post by mortfree » Wed Jan 03, 2018 11:07 am

livesoft wrote:
Wed Jan 03, 2018 9:35 am


One might say that with UTMA / UGMA accounts that if custodians do not do tax-free tax-gain harvesting every year, then it is possible they are failing in their fiduciary duty.
Would you do anything here for my 4-year old's investment (UTMA) account or should I wait till he's older:
Fund A: +$386
Fund B: +$621
Fund C: +$745
Fund D: +$498

those are the current gains on each fund, held 2-3 years now.

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 11:43 am

mortfree wrote:
Wed Jan 03, 2018 11:07 am
Would you do anything here for my 4-year old's investment (UTMA) account or should I wait till he's older:
I would have tax-gain harvested all I could at 0% tax every year in December. Your funds should be trivial to do this.
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Re: Selling Shares of UTMA Account

Post by mortfree » Wed Jan 03, 2018 12:31 pm

thank you livesoft... I very rarely sell my own stocks so I haven't mastered this approach.

so $1050 minus dividends ($100 as example) is $950. That is how much LT/ST gains I can tax-gain harvest at end of 2018?

After I sell a fund with a gain, just invest right back into it?

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 12:33 pm

I don't know what the dollar amount is for 2018. Also I guess one has to know what the unearned distributions are for 2018 in total which one will not know until late December 2018.
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Wed Jan 03, 2018 12:34 pm

Thanks for the information. I just now need to understand all of it.

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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Wed Jan 03, 2018 12:51 pm

livesoft wrote:
Wed Jan 03, 2018 8:39 am
What is the Cost Basis Method set on the UTMA account? I suspect it is Average Cost. Average Cost forces that oldest shares are sold first, that is in a First-In, First-Out way.

So have him look at his account. I just had my son sell shares in his UTMA in 2017 to take advantage of tax-gain harvesting. He will sell the rest in 2018. His Cost Basis Method was Specific Id, but his account was not at Vanguard and his financial institution had good records going back 21 years, so the actual gains will be trivial to calculate and put on his tax return.
If I understand Wiki correctly, he should sell shares and then purchase the same fund in a taxed account?? His money will stay in a taxed account at Vanguard. Is there a max amount he can do each year??

The tax-gain harvesting is better than selling the UTMA shares and putting the money into his Roth IRA??

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 12:56 pm

He can tax-gain harvest AND put the money in his Roth.

He can put money from his job into his Roth instead of money from the UTMA.

There are lots of things he can do. Neither you nor he have described his financial situation in enough detail to really know what is the best course of action. Yes, we know this year he is a full-time student, but will he graduate in May? Or does he have another 17 months to go? What happens before and after that? It reads like he will make at least $5500 in 2018, but maybe he will make $100,000? One can always wish. :)

And presumably his UTMA has caused him to file tax returns and maybe pay Kiddie Tax for a few years now.
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Re: Selling Shares of UTMA Account

Post by Wagnerjb » Wed Jan 03, 2018 1:06 pm

indexonlyplease wrote:
Wed Jan 03, 2018 8:33 am
This year my 21 year old son will start selling $5500 of his UTMA Account and put the money into his Roth IRA. His account is at Vanguard.

He is a full time student with part time job. Makes enough to cover the Roth IRA. So, he is taking advantage of the low income bracket and will not have to pay capital gains.

I have invested into his UTMA since he was very young. He has around $40,000 in this account.

Question: does he need to tell Vanguard to sell the old shares first. Or is this something they do. I never kept track of purchase price. He will do this every year until money is gone.

Money is in two funds Vanguard Total Stock Market and Vanguard Total International Stock Market 75/25. His Roth IRA is Vanguard 2060 Fund.

Thanks in advance.
Other posters have highlighted the Kiddie Tax. I might consider selling enough shares to generate a capital gain that equals the amount allowed tax-free under the Kiddie Tax rules (you should verify this, it is around $2100?). Fund the rest of the Roth IRA with new money. I would recommend selling enough shares to generate a capital gain right up to the tax free amount every year going forward, until the Kiddie Tax no longer applies.

Best wishes.
Andy

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Re: Selling Shares of UTMA Account

Post by livesoft » Wed Jan 03, 2018 1:43 pm

Wagnerjb wrote:
Wed Jan 03, 2018 1:06 pm
I would recommend selling enough shares to generate a capital gain right up to the tax free amount every year going forward, until the Kiddie Tax no longer applies.
One can do that, but there is more to unearned income than realized capital gains. A problem is mutual funds pay dividends probably 4 times a year and those dividends/distributions will be added to annual unearned income. So doing the realized capital gain right up to the tax free amount right now could be interesting when it comes to tax time.
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Wed Jan 03, 2018 5:37 pm

Son has another 2 years of college.
Will continue working part time a Publix while going to college.
After college unknown what he will make.
College is paid for with the Florida Pre paid plan.
Supported by parents outside of the part time job. Meaning food, shelter car insurance.

He is going to school for a BA in Business. He is not sure what career he will follow after college.

Still living at home now and I assume will after college until he get his full time job that makes enough to support him in South Florida (expensive place to live).

We discussed 2 options: let the money sit in the 2 funds and grow for future use of the unknown or Sell the funds and put in the Roth IRA.

I am trying to help him decide which would be the better action to take. We both like the idea of the money being invested for retirement.

Hope this explains a little better.
Last edited by indexonlyplease on Wed Jan 03, 2018 6:00 pm, edited 1 time in total.

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Re: Selling Shares of UTMA Account

Post by Grt2bOutdoors » Wed Jan 03, 2018 5:57 pm

livesoft wrote:
Wed Jan 03, 2018 1:43 pm
Wagnerjb wrote:
Wed Jan 03, 2018 1:06 pm
I would recommend selling enough shares to generate a capital gain right up to the tax free amount every year going forward, until the Kiddie Tax no longer applies.
One can do that, but there is more to unearned income than realized capital gains. A problem is mutual funds pay dividends probably 4 times a year and those dividends/distributions will be added to annual unearned income. So doing the realized capital gain right up to the tax free amount right now could be interesting when it comes to tax time.
My understanding with new tax law is Kiddie Tax goes away, however income tax rate is based on Trusts and Estates rates. The first dollar of income is subject to a rate of 12% up to $2,950 before rates rise.
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Wed Jan 03, 2018 6:25 pm

I just read this dicussing the kiddie tax law for 2018:
The TCJA increases the standard deduction for all single taxpayers, including dependent children, to $12,000 effective 2018. Thus, children can earn a total of $12,000 in income, whether earned or unearned, without paying any tax.

Does this mean selling the UTMA up to this amount will cause no taxes each yr?

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Re: Selling Shares of UTMA Account

Post by EddyB » Wed Jan 03, 2018 9:07 pm

CyclingDuo wrote:
Wed Jan 03, 2018 10:57 am

Or the custodians could fail to the point that the UTMA portfolio grows so well and are throwing off enough unearned income that college and all expenses are totally paid for, and the kids end up with no debt as well as a nice portfolio of their own to launch into their careers and life. :mrgreen:
But the kids still would have been better off if the custodian had harvested tax-free gains along the way.

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Re: Selling Shares of UTMA Account

Post by betablocker » Thu Jan 04, 2018 1:28 pm

Wondering if anyone has seen any info on whether UTMAs still make sense under the new tax law.

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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Thu Jan 18, 2018 7:15 am

livesoft wrote:
Wed Jan 03, 2018 12:56 pm
He can tax-gain harvest AND put the money in his Roth.

He can put money from his job into his Roth instead of money from the UTMA.

There are lots of things he can do. Neither you nor he have described his financial situation in enough detail to really know what is the best course of action. Yes, we know this year he is a full-time student, but will he graduate in May? Or does he have another 17 months to go? What happens before and after that? It reads like he will make at least $5500 in 2018, but maybe he will make $100,000? One can always wish. :)

And presumably his UTMA has caused him to file tax returns and maybe pay Kiddie Tax for a few years now.
Son has another 2 years of college.
Will continue working part time a Publix while going to college.
After college unknown what he will make.
College is paid for with the Florida Pre paid plan.
Supported by parents outside of the part time job. Meaning food, shelter car insurance.

He is going to school for a BA in Business. He is not sure what career he will follow after college.

Still living at home now and I assume will after college until he gets his full time job that makes enough to support himself in South Florida (expensive place to live).

We discussed 2 options: let the money sit in the 2 funds and grow for future use of the unknown or Sell the funds and put in the Roth IRA.

I am trying to help him decide which would be the better action to take. We both like the idea of the money being invested for retirement.

Hope this explains a little better.

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Re: Selling Shares of UTMA Account

Post by Wagnerjb » Thu Jan 18, 2018 8:08 am

indexonlyplease wrote:
Wed Jan 03, 2018 6:25 pm
I just read this dicussing the kiddie tax law for 2018:
The TCJA increases the standard deduction for all single taxpayers, including dependent children, to $12,000 effective 2018. Thus, children can earn a total of $12,000 in income, whether earned or unearned, without paying any tax.

Does this mean selling the UTMA up to this amount will cause no taxes each yr?
I just noticed this post, from earlier in this thread. I don't believe that is correct, as it applies to unearned income for children. I saw a similar quote in a different thread, so maybe this information has been posted somewhere on the internet. The vast majority of tax authorities do not suggest that the first $12k of unearned income will be tax free.

Best wishes.
Andy

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Re: Selling Shares of UTMA Account

Post by livesoft » Thu Jan 18, 2018 9:14 am

Until one understands the new kiddie tax rules completely I think one cannot make a decision.

If the UTMA is invested tax efficiently then it should not create any income that is taxed, so selling it is not so important. Since young adult is earning money, that earned money can be used to fund Roth now if they don't need to spend their money.

Later, when taxes on selling the UTMA drop because kiddie tax would not apply it might make sense to tax gain harvest there.

Anyways, I won't know enough about kiddie tax until September when I look at it in detail to give further advice here. All I can say is that it seem to apply here.

In meantime, the distributions in the taxable account maybe should not be automatically reinvested. They should be spent or contributed to a Roth.
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Sat Mar 03, 2018 11:04 am

Follow up after visit with accountant.

My accountant confirmed that selling the funds from the UTMA (which really now is my son's tax account from transfer) would be wise since he is in the zero percent tax bracket. He will also be there for years while still in school and workimg part time.

He sold $5500 and placed into his Roth IRA (2018 max). Also, sold some to max out 2017 Roth IRA (around $2300).

I figure it will take him around 6 yrs to get move over all the money. When he graduates college and gets a good paying job, we will have to look at tax gain harvest etc. to stop capital gains tax.

Thanks for all replies.

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Sat Mar 03, 2018 1:55 pm

You might need a different accountant if they didn't take into account the Kiddie Tax rules. Now even a broken clock is right twice day, but you don't want to depend on luck.

You didn't indicate what your son's earned income would be this year. Since your son is clearly making >= $700/year in earned income this year. His standard deduction = the lessor of (earned income + $350) or $12,000.

So at most he only has a $350 standard deduction to apply against his unearned income. Then if $350, up to $1,750 is taxed at his tax rate. Ordinary Income (OI) interest and non-qualified dividends = 10%, Qualified Dividends and Capital Gains (QD&CG) 0%. The remainder will be taxed at trust rates. Luckily It just so happens that the first trust tax bracket is OI $0 - $2,550 = 10%, and QD&CG $0 - $2600 = 0%.

The $5500, is not what matters, rather what is the total unearned income. E.g. Income subject to OI + QD&CG taxes . Any amount > ($350 + 1,750 + $2,600) = $4,700 will push you into the 15% QD&CG tax rate.

So the amount you should pay attention to is $4,700 in unearned income. In fact, if the unearned income < $4,700, he should tax gain harvest the amount available at 0%.

Edited to reflect libralibra:'s post
Last edited by Spirit Rider on Sat Mar 03, 2018 5:48 pm, edited 1 time in total.

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Re: Selling Shares of UTMA Account

Post by libralibra » Sat Mar 03, 2018 4:38 pm

People always say the next $1050 is taxed at the child's rate (even Kitces), but when I went over the 8615 that included earned income, it was actually a deduction of earned+350 and then 2100-350=$1750 taxed at the child's rate.

The other thing to remember is that the taxes between the parent's (now trust) and child's rates are calculated pro-rata. Meaning if you have LT vs ST (or Int vs QDiv), then some tax will not be at the 0% rate, and you can't lump it all into kid's to get a better deal. This was a bigger issue when the parent's marginal rate was already 28%+, but now with the trust rate, the first dollar gets the 10% rate in ST or Int earnings.

Anyway, if your son sold $7800, it depends on what his gains were, whether they were ST or LT, and also how much Div or Int he makes this year. It may not be a 0% tax bill, however, as your accountant is saying. (ETA: well maybe if he has less than $350 interest, gains are all LT, basis is around 1/2, and he makes a couple hundred in QDivs, then it does squeeze under the bar!)

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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Sat Mar 03, 2018 6:00 pm

Spirit Rider wrote:
Sat Mar 03, 2018 1:55 pm
You might need a different accountant if they didn't take into account the Kiddie Tax rules. Now even a broken clock is right twice day, but you don't want to depend on luck.

You didn't indicate what your son's earned income would be this year. Since your son is clearly making >= $700/year in earned income this year. His standard deduction = the lessor of (earned income + $350) or $12,000.

So at most he only has a $350 standard deduction to apply against his unearned income. Then if $350, up to $1,750 is taxed at his tax rate. Ordinary Income (OI) interest and non-qualified dividends = 10%, Qualified Dividends and Capital Gains (QD&CG) 0%. The remainder will be taxed at trust rates. Luckily It just so happens that the first trust tax bracket is OI $0 - $2,550 = 10%, and QD&CG $0 - $2600 = 0%.

The $5500, is not what matters, rather what is the total unearned income. E.g. Income subject to OI + QD&CG taxes . Any amount > ($350 + 1,750 + $2,600) = $4,700 will push you into the 15% QD&CG tax rate.

So the amount you should pay attention to is $4,700 in unearned income. In fact, if the unearned income < $4,700, he should tax gain harvest the amount available at 0%.

Edited to reflect libralibra:'s post
I undestand the kiddie tax concern. So does this mean we will never pay kiddie tax. Also, if he does have to pay some tax next year which I can't see, it will still be better to move the money over to the Roth now. Instead of just letting it sit in a tax account for the next 40 years.

indexonlyplease
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Sat Mar 03, 2018 6:04 pm

libralibra wrote:
Sat Mar 03, 2018 4:38 pm
People always say the next $1050 is taxed at the child's rate (even Kitces), but when I went over the 8615 that included earned income, it was actually a deduction of earned+350 and then 2100-350=$1750 taxed at the child's rate.

The other thing to remember is that the taxes between the parent's (now trust) and child's rates are calculated pro-rata. Meaning if you have LT vs ST (or Int vs QDiv), then some tax will not be at the 0% rate, and you can't lump it all into kid's to get a better deal. This was a bigger issue when the parent's marginal rate was already 28%+, but now with the trust rate, the first dollar gets the 10% rate in ST or Int earnings.

Anyway, if your son sold $7800, it depends on what his gains were, whether they were ST or LT, and also how much Div or Int he makes this year. It may not be a 0% tax bill, however, as your accountant is saying. (ETA: well maybe if he has less than $350 interest, gains are all LT, basis is around 1/2, and he makes a couple hundred in QDivs, then it does squeeze under the bar!)
This is what we looked like but will not know until next tax season for sure. All gains are LT.

indexonlyplease
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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Sat Mar 03, 2018 6:13 pm

Is there a limit on the amount of shares you can sell when Tax Gain Harvesting.

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Sat Mar 03, 2018 6:18 pm

You missed the point of my post.

After corrected which is in your quote. Any unearned income > $2,100 will be subject to the Kidde Tax. Only unearned income up to $4,700 may be subject to a 0% capital gains tax rate. As pointed out by libralibra: a pro-rata amount of ordinary income will be subject to the Kiddie Tax.

The bottom line is that the sweet spot is $4,700 for 2018. Any taxable capital gains that causes the total unearned income to be > $4,700 will be subject to a minimum capital gains tax rate of 15%. You really should be targeting that limit for the amount you redeem/tax gain harvest.

Remember we are talking about "taxable" gains and not the basis that will exist in any securities sold.

P.S. There is no limit to the amount of shares you tax gain harvest, but as pointed out above, there is a limit where they will not be subject to any capital gains taxes and make sense. You need to pay attention to what the taxable gains are involved with each sale and what other taxable distributions there will be in a give year.

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Re: Selling Shares of UTMA Account

Post by indexonlyplease » Sat Mar 03, 2018 8:09 pm

Spirit Rider wrote:
Sat Mar 03, 2018 6:18 pm
You missed the point of my post.

After corrected which is in your quote. Any unearned income > $2,100 will be subject to the Kidde Tax. Only unearned income up to $4,700 may be subject to a 0% capital gains tax rate. As pointed out by libralibra: a pro-rata amount of ordinary income will be subject to the Kiddie Tax.

The bottom line is that the sweet spot is $4,700 for 2018. Any taxable capital gains that causes the total unearned income to be > $4,700 will be subject to a minimum capital gains tax rate of 15%. You really should be targeting that limit for the amount you redeem/tax gain harvest.

Remember we are talking about "taxable" gains and not the basis that will exist in any securities sold.

P.S. There is no limit to the amount of shares you tax gain harvest, but as pointed out above, there is a limit where they will not be subject to any capital gains taxes and make sense. You need to pay attention to what the taxable gains are involved with each sale and what other taxable distributions there will be in a give year.
Great thanks for the information.

Question: Tax Gain Harvest also works like selling some of the 2 funds we did and placing into the Roth. It does not need to be the same fund?? I also read that Vanguard does not allow you to buy the same fund within 60 days.

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Sat Mar 03, 2018 8:56 pm

Yes, all you are doing is selling funds and buying others to turn the unrealized gains into realized gains while in a lower capital gains tax bracket. In this case 0%.

Most funds do have short-term trading restrictions, but there are plenty of options like those you would use for tax loss harvesting.

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Re: Selling Shares of UTMA Account

Post by davel316 » Sat Sep 08, 2018 7:50 pm

I have had a very difficult time finding the right answer to how much of the first x dollars is tax free. It seems like different web sites say different things. This is what Nolo says:

"Starting in 2018 and scheduled to continue through 2025, the Tax Cuts and Jobs Act changes the rates for the Kiddie Tax. During these years, children's unearned income will not be taxed at their parents income tax rates. Instead, all net unearned income over a threshold amount--$2,100 for 2018--is taxed using the brackets and rates for trusts and estates. These are shown in the following chart:
Kiddie Taxable Unearned Income
Tax Rate
up to $2,550 10%
$2,551 to $9,150 24%
$9,151 to $12,500 35%
all over $12,501 37%

This greatly simplifies the kiddie tax by applying a single set of tax rates to all of a child’s unearned income. Moreover, a child's tax rate is no longer affected by his or her parents’ tax situation or the unearned income of any siblings.
However, the new rates can be higher than the parents’ rates which would have applied under prior law. For example, the kiddie tax rate is 37% on income over $12,500. A married couple would have to have over $600,000 in income in 2018 to pay tax at this rate. On the other hand, children with smaller unearned incomes could pay less under the new tax rates. For example, a child can have up to $4,650 in unearned income and pay only a 10% tax on $2,550 of it, for a $255 total tax. Most parents pay income tax at a higher rate than 10% (married taxpayers would have to have a taxable income of $19,050 or less to pay tax at this rate)."

So, this makes it sound like the first $2100 in unearned income is tax free, and then the next $2550 is taxed at 10%. Is it different if the unearned income is cap gain (as I think you are saying that the first $4600 is tax free if it is cap gain)? Other sites i have read make it sound like none of it is fully tax free.

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Sat Sep 08, 2018 8:48 pm

davel316 wrote:
Sat Sep 08, 2018 7:50 pm
So, this makes it sound like the first $2100 in unearned income is tax free, and then the next $2550 is taxed at 10%. Is it different if the unearned income is cap gain (as I think you are saying that the first $4600 is tax free if it is cap gain)? Other sites i have read make it ntssound like none of it is fully tax free.
Only the first $1050 in only unearned ordinary income is covered by a standard deduction and tax free. The next $1050 in unearned ordinary income is taxed at the dependent's ordinary income tax rate (currently 10%). The next $2550 in unearned ordinary income is taxed at the 1st trust bracket ordinary income tax rate (currently 10%).

If the dependents unearned income is 100% capital gains and qualified dividends, The first $1050 is covered by a standard deduction.The next $1050 is taxed at the dependents LTCG/QDIV tax rate (currently 0%). The next $2600 is taxed at the 1st trust bracket LTCG/QDIV tax rate (currently 0%).

<= 2017 it could be little more complicated than this as there were worksheets in the Form 8615 Instructions for qualified dividends and net capital gain. We will have to wait and see what the new Form 8615 Instructions are. The 2018 Line 7 Tax Computation Worksheet has recently been added to the 2018 draft Form 8615 Instructions, but the Qualified Dividends and Capital Gain Tax Worksheet and Schedule D Tax Worksheet are not yet available.

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Re: Selling Shares of UTMA Account

Post by davel316 » Wed Sep 26, 2018 8:56 pm

Thank you. So, if all goes well with the 2018 tax forms (for filing in Apr 2019), then $4700 of Long Term Cap Gain (LTCG) in UTMA will be completely tax free, correct?

How would this change if earned income is involved. So, say that the child has $4700 LTCG and $3000 earned income?

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Thu Sep 27, 2018 6:58 am

If a dependent with a UTMA has earned income that can reduce the unearned income standard deduction to $350. This makes $350 - $2100 subject to the dependent's marginal tax rates.

The capital gains tax rate on this amount will also be 0%. If they have > $350 in ordinary income, that will be taxed at a 10% rate.

As long as their earned income is < $12,000, the standard deduction applies and there will be no taxes on the earned income. However, each dollar > $12,000 - $350, reduces the unearned income standard deduction dollar for dollar until it is $0.

davel316
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Re: Selling Shares of UTMA Account

Post by davel316 » Fri Oct 05, 2018 8:42 pm

So, are you saying that my son could have $4700 of Long Term Cap Gain (unearned income) and $11,650 of earned income, and pay no tax?

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Fri Oct 05, 2018 10:28 pm

I misspoke. All income (earned & unearned) is considered against the deductions.

I believe he could have $5,050 ($4,700 + $350) in LTCG and/or QDIV and with <= $6,950 in earned income and pay no taxes.

davel316
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Re: Selling Shares of UTMA Account

Post by davel316 » Sat Nov 10, 2018 6:21 pm

Spirit Rider - thank you for the info. Has anything further happened with tax forms for 2018 tax year (due Apr 2019) to be able to confirm your last post? Thanks.

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Re: Selling Shares of UTMA Account

Post by Spirit Rider » Sat Nov 10, 2018 6:42 pm

Nothing has changed in the forms to my knowledge, but my last post shows that obviously I can't do math.

With $3000 in earned income, there is a $350 unearned income standard deduction meaning the first $350 is tax free. That leaves $2100 - $350 = $1750 taxed at the dependent's tax rate.

So that still leaves just an additional $2600 subject to the first trust capital gains tax bracket. For a total of $4700 not $4700 + $350.

FreeTaxUsa has preliminary 2018 tax return support and I believe TurboTax will on 11/12. You should be able to game these out.

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