Tax gain harvesting for UTMA acoount

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Topic Author
bubbadog
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Tax gain harvesting for UTMA acoount

Post by bubbadog »

My 20 year old son has a UTMA account with a current value of around $30,000 invested 100% in VG total stock market index.

He has an income of about $6,000 this year from summer work.

About $5,000 of his account value is unrealized capital gains (basis of 25K) which the majority are long term gains.

Does it make sense to take advantage of tax gain harvesting in this situation?

Pros? Cons?

Thank you :idea:
livesoft
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Re: Tax gain harvesting for UTMA acoount

Post by livesoft »

Yes it does. Pros: Get tax-free income. Learn how to fill out a tax return. Cons: None.
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retiringwhen
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Re: Tax gain harvesting for UTMA acoount

Post by retiringwhen »

livesoft wrote: Mon Dec 10, 2018 10:49 am Yes it does. Pros: Get tax-free income. Learn how to fill out a tax return. Cons: None.
+1
ljb
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Re: Tax gain harvesting for UTMA acoount

Post by ljb »

Learning all the tax issues thoroughly can be daunting. I suggest: buy a good tax software program (TurboTax recommended) asap and put in estimated numbers for 2018 before the end of 2018. Whether the whole gain or part of it can be taken with no capital gains tax rate will depend on several things: will he be claimed as someone's dependent, is he a student, his total earned and unearned income. You can vary your inputs to the software to see how much of the gain to take. But you will have to make a decision whether to sell the mutual fund before the end of the year. Then in 2019, after he receives his W-2 and other tax docs, you can use TurboTax to put in exact numbers and do his tax return.

I now try to buy TurboTax every December to help me make decisions regarding tax loss and gain harvesting before the end of the year. I missed out on considerable tax gains that I could have taken at 0% tax rate in the past because I wasn't sure how to figure them.

If you don't want to pay the ~$40 for TurboTax, I think the free version of TaxAct is pretty good too. Actually, for federal taxes only, there may be several free options.
Topic Author
bubbadog
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Re: Tax gain harvesting for UTMA acoount

Post by bubbadog »

If he has income of only $6,000 from summer work and $5,000 max in capital gains, he should not owe any federal income tax, correct?

I assume he would owe some additional state tax.

Trying to understand this and perhaps get his basis close to the current value of the account while he is a student and not generating much employment income.
Grt2bOutdoors
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Re: Tax gain harvesting for UTMA acoount

Post by Grt2bOutdoors »

bubbadog wrote: Mon Dec 10, 2018 12:40 pm If he has income of only $6,000 from summer work and $5,000 max in capital gains, he should not owe any federal income tax, correct?

I assume he would owe some additional state tax.

Trying to understand this and perhaps get his basis close to the current value of the account while he is a student and not generating much employment income.
Search for my response last night regarding tax gain harvesting and UTMA. Within the response was a link to a good primer on the effect of this years tax law changes and the taxation of minors/Utma. I think you’ll find your question answered there, it just requires a little bit of simple math.

He had a standard deduction of $12k, his earned income is $6k + roughly QDI of another $600. - no tax there. He had $5k of long term capital gains? Take it the rest of the way.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
bubbadog
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Re: Tax gain harvesting for UTMA acoount

Post by bubbadog »

Grt2bOutdoors wrote: Mon Dec 10, 2018 1:00 pm
bubbadog wrote: Mon Dec 10, 2018 12:40 pm If he has income of only $6,000 from summer work and $5,000 max in capital gains, he should not owe any federal income tax, correct?

I assume he would owe some additional state tax.

Trying to understand this and perhaps get his basis close to the current value of the account while he is a student and not generating much employment income.
Search for my response last night regarding tax gain harvesting and UTMA. Within the response was a link to a good primer on the effect of this years tax law changes and the taxation of minors/Utma. I think you’ll find your question answered there, it just requires a little bit of simple math.

He had a standard deduction of $12k, his earned income is $6k + roughly QDI of another $600. - no tax there. He had $5k of long term capital gains? Take it the rest of the way.
Thank you!
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HueyLD
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Re: Tax gain harvesting for UTMA acoount

Post by HueyLD »

bubbadog wrote: Mon Dec 10, 2018 12:40 pm If he has income of only $6,000 from summer work and $5,000 max in capital gains, he should not owe any federal income tax, correct?

I assume he would owe some additional state tax.

Trying to understand this and perhaps get his basis close to the current value of the account while he is a student and not generating much employment income.
I assume that you claim your son as a dependent on your tax return. If the answer is yes, then he will owe federal taxes.

As a dependent, his standard deduction for his earned income level is $6,350. So, his earned income is shielded by his standard deduction.

However, if his unearned income is $5,0000, he will be subject to the "kiddie tax" and it is a good idea to use a tax software to figure out his tax liability.
Topic Author
bubbadog
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Re: Tax gain harvesting for UTMA acoount

Post by bubbadog »

HueyLD wrote: Mon Dec 10, 2018 3:11 pm
bubbadog wrote: Mon Dec 10, 2018 12:40 pm If he has income of only $6,000 from summer work and $5,000 max in capital gains, he should not owe any federal income tax, correct?

I assume he would owe some additional state tax.

Trying to understand this and perhaps get his basis close to the current value of the account while he is a student and not generating much employment income.
I assume that you claim your son as a dependent on your tax return. If the answer is yes, then he will owe federal taxes.

As a dependent, his standard deduction for his earned income level is $6,350. So, his earned income is shielded by his standard deduction.

However, if his unearned income is $5,0000, he will be subject to the "kiddie tax" and it is a good idea to use a tax software to figure out his tax liability.
I put some rough numbers into Tax Act's free online calculator and it shows no Federal tax owed.

Earned income: $6,000 (summer job)
Long term cap gains: $4,600
Capital loss: $100
Total combined income of $10,500 for 2018 if I tax gain harvest.

I still plan to check with our accountant just to be certain.

Currently he is 100% invested in VTSAX.

If I proceed, should I sell all shares and place in money market account, wait a day, and then buy VTSAX again? If I was buying something else, I could do an exchange but I don't see how you can exchange into the same fund.
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HueyLD
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Re: Tax gain harvesting for UTMA acoount

Post by HueyLD »

Did you tell TaxAct online calculator that your son is a dependent? If yes, the calculator apparently doesn't know anything about the kiddie tax. Keep in mind that many tax softwares are still in their preliminary versions and kiddie tax is an advanced subject that may not be properly programmed untill after January.

If you are willing to read and learn, the IRS has both form 8615 and its instructions published for 2018. Here are the links. Of course you should check with your CPA to make sure that you understand the form.

https://www.irs.gov/pub/irs-pdf/f8615.pdf

https://www.irs.gov/pub/irs-pdf/i8615.pdf
Grt2bOutdoors
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Re: Tax gain harvesting for UTMA acoount

Post by Grt2bOutdoors »

Check with accountant but a “good” accountant will calculate what the maximum amount of capital gains you can incur before being subject to taxation. It doesn’t have to be $5k LTCG or nothing. Good Luck!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: Tax gain harvesting for UTMA acoount

Post by Grt2bOutdoors »

HueyLD wrote: Tue Dec 11, 2018 5:50 am Did you tell TaxAct online calculator that your son is a dependent? If yes, the calculator apparently doesn't know anything about the kiddie tax. Keep in mind that many tax softwares are still in their preliminary versions and kiddie tax is an advanced subject that may not be properly programmed untill after January.

If you are willing to read and learn, the IRS has both form 8615 and its instructions published for 2018. Here are the links. Of course you should check with your CPA to make sure that you understand the form.

https://www.irs.gov/pub/irs-pdf/f8615.pdf

https://www.irs.gov/pub/irs-pdf/i8615.pdf
FYI - Publication 929 which goes hand in hand with Form 8615 has not been updated for 2018. Since the tax laws have changed and the 2018 Form 8615 makes reference to Pub. 929, you may have to wait to gain a better understanding. The IRS has a tall order in updating all of its forms and publications to account for the tax law changes.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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HueyLD
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Re: Tax gain harvesting for UTMA acoount

Post by HueyLD »

Please click on the links.

Both form and instructions look "final" to me. There is not any word of "draft" on the 2018 form/instructions.
Topic Author
bubbadog
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Re: Tax gain harvesting for UTMA acoount

Post by bubbadog »

HueyLD and Grt2bOutdoors thanks for your advice!

I have some reading to do. :confused
Spirit Rider
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Re: Tax gain harvesting for UTMA acoount

Post by Spirit Rider »

bubbadog wrote: Mon Dec 10, 2018 11:47 pm I put some rough numbers into Tax Act's free online calculator and it shows no Federal tax owed.

Earned income: $6,000 (summer job)
Long term cap gains: $4,600
Capital loss: $100
Total combined income of $10,500 for 2018 if I tax gain harvest.

I still plan to check with our accountant just to be certain.
Note: With $6000 of earned income he will only have a $350 unearned income deduction. If he has any unearned income taxed as ordinary income* > $350 that will be subject to a 10% tax. It will also reduce amount avail for LTCG/QDIV 0% taxes.

* Interest, non-qualified dividends, etc...
Topic Author
bubbadog
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Location: Cincinnati,Ohio

Re: Tax gain harvesting for UTMA acoount

Post by bubbadog »

Update: I checked with my accountant and they gave me the OK to tax gain harvest my son's account.

I suspect a lot of people whose children have taxable accounts with some LTCGs will take advantage of the 0% tax rate on capital gains.

Thanks to all that helped! :sharebeer
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