Kiddie Tax Changes and UTMA Accounts

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Topic Author
LincolnTunnel
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Kiddie Tax Changes and UTMA Accounts

Post by LincolnTunnel »

I have three kids with no earned income but UTMA's that are sitting on some significant unrealized capital gains. They are about 7, 7, and 9 years away from using these funds for college, and they have about $16k, $16k, and $9k in unrealized capital gains.

I'm trying to understand the right thing to do before the end of the year in light of the news that as of next year the Kiddie Tax will be reverting back to the previous rates, i.e. income over the threshold of $2200 will be taxed at the parent's highest tax bracket. For me that would be at 35% currently (and if I understand correctly, in 2026 when my kids will start to withdraw these funds, my tax bracket would be 39.6% as the TCJA tax brakes are scheduled to expire). As I understand it the current rules, which are still applicable for this year, involve unearned income over the threshold of $2200 being taxed at the rates for Trusts and Estates, which for capital gains is 0% on the first $2650, 15% on capital gains between $2650-$12950, and 20% on capital gains over that.

So as I understand it and as I believe I have seen it mentioned on the board, for each child I can realize up to $4650 of capital gains (minus the dividends they received this year) before incurring any taxes, and I have already done this. But I'm pretty sure it makes sense for me to go beyond that and realize more of these gains so they can pay the taxes now at a much lower rate than they would otherwise incur in the future. e.g. If I go ahead and realize a gain of $12950, then they should owe taxes of ($12950-$4650)*0.15=$1245, which is a savings of over $2000 over what they would pay in taxes on that amount at a rate of 39.6%. It seems like a no brainer for me but I wanted to see if I'm missing something. Are other people doing this?

One thing I can think of is that there is $2200 a year available that can be used to realize gains without incurring taxes, however they had around $1200 in dividends already this past year despite having a significant portion of their portfolio in cash most of the year that is now fully invested, so I don't think there is going to be much of this room left over in the future before incurring taxes.
Topic Author
LincolnTunnel
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Re: Kiddie Tax Changes and UTMA Accounts

Post by LincolnTunnel »

Okay no one has replied here yet but I am more confused than ever. I had a look at the IRS instructions for tax form 8615 and it states that the tax brackets that are currently applicable for unearned income are the ones for trust and estates, not the ones for capital gains for trust and estates. So 10% on net unearned income up to $2600, then 24% above that to $9300... I ran these numbers through TurboTax and it did not show me tax due on unearned income of up to $4650 so what gives?
Grt2bOutdoors
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Grt2bOutdoors »

Link to the news that Kiddie Tax reverts next year? This is news to me.
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HereToLearn
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Re: Kiddie Tax Changes and UTMA Accounts

Post by HereToLearn »

Grt2bOutdoors wrote: Sun Dec 29, 2019 9:33 pm Link to the news that Kiddie Tax reverts next year? This is news to me.
https://www.savingforcollege.com/articl ... ie-tax-fix

https://www.forbes.com/sites/kellyphill ... 88e651abc8

The new version of the kiddie tax introduced the Tax Cuts and Jobs Act (TCJA) has been repealed. The effective date is supposed to begin with the 2020 tax year, but you can elect to have it apply to the 2018 and 2019 tax years (expect guidance from IRS on this).
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WoodSpinner
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Re: Kiddie Tax Changes and UTMA Accounts

Post by WoodSpinner »

OP,

How did you get $4650?
SnowBog
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Re: Kiddie Tax Changes and UTMA Accounts

Post by SnowBog »

LincolnTunnel wrote: Sun Dec 29, 2019 12:40 am As I understand it the current rules, which are still applicable for this year, involve unearned income over the threshold of $2200 being taxed at the rates for Trusts and Estates, which for capital gains is 0% on the first $2650, 15% on capital gains between $2650-$12950, and 20% on capital gains over that.

So as I understand it and as I believe I have seen it mentioned on the board, for each child I can realize up to $4650 of capital gains (minus the dividends they received this year) before incurring any taxes, and I have already done this. But I'm pretty sure it makes sense for me to go beyond that and realize more of these gains so they can pay the taxes now at a much lower rate than they would otherwise incur in the future. e.g. If I go ahead and realize a gain of $12950, then they should owe taxes of ($12950-$4650)*0.15=$1245, which is a savings of over $2000 over what they would pay in taxes on that amount at a rate of 39.6%. It seems like a no brainer for me but I wanted to see if I'm missing something. Are other people doing this?
I have this same question... And my thinking aligns with yours... This may be a good time to opt to pay taxes (if you happen to have a higher parent tax rate than the trust rate).

I have way less gains, but I was hoping to make additional contributes (and conversions of appreciated stock) up to $4k/year or so for the next 10 years, and am debating doing so in advance this year...

What's currently holding me back is:
  • this money is earmarked for college, but I could potentially have my child take loans (in 6+ years) for college
  • When my child is no longer claimed as a dependent, I believe the kiddie tax no longer applies, they'll be taxed at their rates (potentially paying no tax, or far less tax than my rates) on gains (and they don't need to recognize the gains until then)
  • this may give me more years of state tax deduction for 529 contributions (with the other SECURE Act change allowing for 529 funds to be used for loans - up to $10k/person IIRC)
So while this is different from the timeline/cash flow I originally had in mind, it may let me avoid most of the higher taxes related to reverting the kiddie tax rules.

But it adds the risk of the UTMA funds being used for something other than college, as their may be funds left when my child takes over the account. Currently I think the "loan" offsets that risk... (time will tell...)
SnowBog
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Re: Kiddie Tax Changes and UTMA Accounts

Post by SnowBog »

WoodSpinner wrote: Sun Dec 29, 2019 10:13 pm OP,

How did you get $4650?
My understanding is the first $2200 (or so) of unearned gains is not taxes (pre- and post- SECURE Act changes).

The next $2450 (or up to around $4600, perhaps by another combination) of LTCG is taxed at the 0% "trust" rate.

Optionally this year, and required by law (SECURE Act) next year, that second $2450 becomes taxed at the parents top marginal rate.
bubbadog
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Re: Kiddie Tax Changes and UTMA Accounts

Post by bubbadog »

I have been trying to find the same answers as the OP. My current understanding is that on unearned income one can realize $4,850 of LTCGs and QDIVs before paying any additional tax. The $4,850 comes from a $2,200 standard deduction on unearned income and 0% capital gains rate for LTCG/QDIVs up to $2,650. I believe the $4,650 the OP mentioned may have been a simple math error.

If anyone knows better, please chime in. I only have 2 days to pull the trigger on my children's UTMA accounts.
Katietsu
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Katietsu »

Assuming only unearned income:
The standard deduction for a dependent with only unearned income is $1100.
-The next $1100 is taxed at the child’s rate. This would be 10% but LTCG & qualified dividends do get the 0% rate in this bracket.
-Higher taxable amounts trigger the kiddie tax. Using trust and estate rates to calculate the kiddie tax is still an option for 2019. This DOES include the same preferential treatment that trusts and estates receive for LTCG and qualified dividends.
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Peter Foley
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Peter Foley »

Snowbog wrote:
Optionally this year, and required by law (SECURE Act) next year, that second $2450 becomes taxed at the parents top marginal rate.

Please clarify. Are a minor's long term capital gains taxed at the parents' "marginal tax rate" or the parents' "long term capital gains rate"?
SnowBog
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Re: Kiddie Tax Changes and UTMA Accounts

Post by SnowBog »

Peter Foley wrote: Sun Dec 29, 2019 11:44 pm Snowbog wrote:
Optionally this year, and required by law (SECURE Act) next year, that second $2450 becomes taxed at the parents top marginal rate.

Please clarify. Are a minor's long term capital gains taxed at the parents' "marginal tax rate" or the parents' "long term capital gains rate"?
Honestly, I'm not entirely sure... My impression from the little bit I've seen about this, is the SECURE Act reverts the treatment to pre-TCJA (aka pre-2018 tax law changes) rules. As I've only done UTMA contributions/conversions in the last two years, I'm unfamiliar with the new/old rules.

But my understanding from sources such as https://www.forbes.com/sites/troyonink/ ... a137be1c0f is that it would be treated at the parents to marginal rate (not their LG rate)... But I'd really like that to be wrong...
Katietsu
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Katietsu »

Peter Foley wrote: Sun Dec 29, 2019 11:44 pm Snowbog wrote:
Optionally this year, and required by law (SECURE Act) next year, that second $2450 becomes taxed at the parents top marginal rate.

Please clarify. Are a minor's long term capital gains taxed at the parents' "marginal tax rate" or the parents' "long term capital gains rate"?
Assuming that we are returning to the 2017 version kiddie tax, which is my understanding, LTCG and qualified dividends do still receive preferential treatment. The top marginal tax rate for a child’s LTCG would be 20%.
Topic Author
LincolnTunnel
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Re: Kiddie Tax Changes and UTMA Accounts

Post by LincolnTunnel »

bubbadog wrote: Sun Dec 29, 2019 10:47 pm I have been trying to find the same answers as the OP. My current understanding is that on unearned income one can realize $4,850 of LTCGs and QDIVs before paying any additional tax. The $4,850 comes from a $2,200 standard deduction on unearned income and 0% capital gains rate for LTCG/QDIVs up to $2,650. I believe the $4,650 the OP mentioned may have been a simple math error.

If anyone knows better, please chime in. I only have 2 days to pull the trigger on my children's UTMA accounts.
Yes, I'm sorry, I meant to write $4,850.
Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

Yes, you can tax gain harvest additional amounts @15% capital gains tax rates, but for 2019 that amount is $12,950 - $2,650 = $10,300, but the NIIT applies at $12,750. The $2200 amount is the dependent's unearned income standard deduction and amount taxed at the dependent's tax rates.

Only if your 2020 AGI is > $441,450 (S) or $496,600 (MFJ) is a parent(s) capital gains tax rate going to be 20%, but the NIIT applies at $200k (S) and $250K (MFJ).

However, keep in mind when it reverts to using the parents marginal tax rates in 2020. It is at their ordinary income tax rates and capital gains tax rates as applicable. So capital gains are not going to be taxed at a maximum of 37% (39.6% was before the TCJA).
SnowBog
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Re: Kiddie Tax Changes and UTMA Accounts

Post by SnowBog »

Spirit Rider wrote: Mon Dec 30, 2019 12:33 am However, keep in mind when it reverts to using the parents marginal tax rates in 2020. It is at their ordinary income tax rates and capital gains tax rates as applicable. So capital gains are not going to be taxed at a maximum of 37% (39.6% was before the TCJA).
If I'm reading correctly, in 2020 LTCG would still be taxed at [parents] LTCG rates, not the parents ordinary marginal rate.

So I'm 2020 even if there were $2000 of LTCG taxed (so $4200 total I think with the $2200 standard deduction), the tax rate would be at our LTCG rate not or marginal (ordinary) rate.

I'm I following correctly?
Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

If they are qualified dividends or long-term capital gains. The amounts > $2200 will be taxed at the parent's capital gains tax rate.
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LincolnTunnel
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Re: Kiddie Tax Changes and UTMA Accounts

Post by LincolnTunnel »

Spirit Rider wrote: Mon Dec 30, 2019 1:28 am If they are qualified dividends or long-term capital gains. The amounts > $2200 will be taxed at the parent's capital gains tax rate.
So the highest possible rate would be 20% + the NIIT which is 3.8%, is that correct?
Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

LincolnTunnel wrote: Mon Dec 30, 2019 1:38 am
Spirit Rider wrote: Mon Dec 30, 2019 1:28 am If they are qualified dividends or long-term capital gains. The amounts > $2200 will be taxed at the parent's capital gains tax rate.
So the highest possible rate would be 20% + the NIIT which is 3.8%, is that correct?
Correct.

Your original premise is valid. If a UTMA has large unrealized gains and the parents are subject to NIIT (15% + 3.8% = 18.8%) and maybe the 20% bracket (20% + 3.8% = 23.8%). It may make sense to realize those gains up to the NIIT trust level ($12,750). If those and future gains can not be tax gain harvested capital gains tax free up to top of the dependent's bracket (2019 = 2,200) before the money is needed.
nolesrule
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Re: Kiddie Tax Changes and UTMA Accounts

Post by nolesrule »

So starting next year, if we're in NIIT as the parents, the kids will also pay NIIT on any investment income (which includes bank interest) that exceeds $2200? and the 0% LTCG space above the standard deduction is gone entirely?
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Wiggums
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Wiggums »

A fix for the Kiddie Tax fiasco is included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was attached to the Further Consolidated Appropriations Act of 2020.

The fix appears in section 501 of Title V of Division O of the legislation, which was approved by the House on December 17, 2019 by a vote of 297 to 120 and by the Senate on December 19, 2019 by a vote of 71-23.

The Cause of the Problem
The Tax Cuts and Jobs Act of 2017 changed the so-called Kiddie Tax, which taxed a child’s unearned income at the tax rates of the child’s parents. Starting in 2018, however, the Kiddie Tax was based on the much higher tax rates for estates and trusts.

This significantly increased the tax rates that apply to the taxable portion of college grants, scholarships and fellowships and to military survivor benefits of Gold Star families. It also caused low- and middle-income children to be taxed at much higher rates than their parents.

This table compares the 2018 income thresholds at which each tax rate applies for parents and for estates and trusts. It demonstrates that the higher tax rates for the Kiddie Tax started at much lower income levels.

Tax Rate
Parents (MFJ)
Estates and Trusts

24%
$165,000
$2,550

32%
$315,000
N/A

35%
$400,000
$9,150

37%
$600,000
$12,500

Families were shocked when they saw the increase in their tax liability from the Kiddie Tax changes. Many families had to scramble to find the money to pay the big tax bills.

Undoing the Damage
The SECURE Act repeals the change to the Kiddie Tax, reverting to the rules that were in effect before 2018.

This change is effective for tax years that begin after December 31, 2019.

However, the legislation allows taxpayers to elect to have the change apply retroactively to the 2018 and/or 2019 tax years. Taxpayers will probably have to file amended federal income tax returns to claim a refund of the excess tax.
livesoft
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Re: Kiddie Tax Changes and UTMA Accounts

Post by livesoft »

I didn't read all the responses, but after dealing with wrapping up and ending 2 different UTMA accounts for my children who are now adults, I would recommend tax-gain harvesting each year NO MATTER WHAT TAX LAWS APPLY. So parents have today and tomorrow to wrap up any tax-gain harvesting in their children's UTMA/UGMA accounts. How much to tax-gain harvest? Use tax prep software to find out.
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aristotelian
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Re: Kiddie Tax Changes and UTMA Accounts

Post by aristotelian »

OP, I am guessing that Turbotax hasn't been updated yet.
livesoft
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Re: Kiddie Tax Changes and UTMA Accounts

Post by livesoft »

Wiggums wrote: Mon Dec 30, 2019 10:19 am This change is effective for tax years that begin after December 31, 2019.

However, the legislation allows taxpayers to elect to have the change apply retroactively to the 2018 and/or 2019 tax years. Taxpayers will probably have to file amended federal income tax returns to claim a refund of the excess tax.
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Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

nolesrule wrote: Mon Dec 30, 2019 9:34 am So starting next year, if we're in NIIT as the parents, the kids will also pay NIIT on any investment income (which includes bank interest) that exceeds $2200? and the 0% LTCG space above the standard deduction is gone entirely?
Dependents subject to the Kiddie Tax will again be subject to all their parent's marginal taxation at ordinary income, capital gains and NIIT tax rates for unearned income > $2200 (2020).

Dependent's subject to the Kiddie Tax did/do/will not have any of the 0% LTCG space that other taxpayers have. That has been true for many years. The extra first trust 0% capital gains tax bracket (2019 = $2650) of the TCJA is what will be gone starting in 2020.
nolesrule
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Re: Kiddie Tax Changes and UTMA Accounts

Post by nolesrule »

Spirit Rider wrote: Mon Dec 30, 2019 10:35 am
nolesrule wrote: Mon Dec 30, 2019 9:34 am So starting next year, if we're in NIIT as the parents, the kids will also pay NIIT on any investment income (which includes bank interest) that exceeds $2200? and the 0% LTCG space above the standard deduction is gone entirely?
Dependents subject to the Kiddie Tax will again be subject to all their parent's marginal taxation at ordinary income, capital gains and NIIT tax rates for unearned income > $2200 (2020).

Dependent's subject to the Kiddie Tax did/do/will not have any of the 0% LTCG space that other taxpayers have. That has been true for many years. The extra first trust 0% capital gains tax bracket (2019 = $2650) of the TCJA is what will be gone starting in 2020.
Okay, that was my understanding, I think perhaps I did a lousy job phrasing the question. :happy Our kids accounts having gains were a fairly recent thing for us, and 2019 was the first year we did any Tax Gain Harvesting. We'll need to keep a tighter eye on things going forward, since there will be less head room, and we are in 24/15 + NIIT.
Topic Author
LincolnTunnel
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Re: Kiddie Tax Changes and UTMA Accounts

Post by LincolnTunnel »

Does anyone know how this works with respect to state income taxes? I live in NJ.
the way
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Re: Kiddie Tax Changes and UTMA Accounts

Post by the way »

LincolnTunnel wrote: Sun Dec 29, 2019 12:40 am So as I understand it and as I believe I have seen it mentioned on the board, for each child I can realize up to $4650 of capital gains (minus the dividends they received this year) before incurring any taxes, and I have already done this. But I'm pretty sure it makes sense for me to go beyond that and realize more of these gains so they can pay the taxes now at a much lower rate than they would otherwise incur in the future. e.g. If I go ahead and realize a gain of $12950, then they should owe taxes of ($12950-$4650)*0.15=$1245, which is a savings of over $2000 over what they would pay in taxes on that amount at a rate of 39.6%. It seems like a no brainer for me but I wanted to see if I'm missing something. Are other people doing this?
This is pretty much the right thing to do. Up to $4850 LTCG is taxed at 0% this year. But the part about going up to 12950 may not be right, because either way (this year or next) it would be in the 15% bracket at this amount (unless parents' income is over about 500k).

The repeal seems to hurt kids with LTCG/QDiv income of up to ~5k range, but helps kids who have the other kinds of unearned income in the >12k range. I think for the often mentioned cases (grad students and children of Gold Star families), articles would make the comparison of the parents' 12%/22% bracket vs the trust's 37% bracket. None of the articles bothered to investigate how many families of each category were actually affected though (nor the total tax difference). Also, the repeal does hurt both sets of families in that filing is more complicated again (eg. for the OP who has 3 kids).

btw, the info about NIIT doesn't sound right. NIIT is always tied to the individual's return, so the kid would have to be over the 200k threshold to owe NIIT. I.e. NIIT is not owed this year on income just over the 12k trust tax bracket, nor is it owed next year just because the parents are over their 250k threshold.

(Finally, I wonder if they could have just stuck more unearned income categories onto Form 8814 and allowed the parents to decide whether to use their tax rates or the trust rates.)
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Re: Kiddie Tax Changes and UTMA Accounts

Post by bubbadog »

the way wrote: Mon Dec 30, 2019 2:43 pm
LincolnTunnel wrote: Sun Dec 29, 2019 12:40 am So as I understand it and as I believe I have seen it mentioned on the board, for each child I can realize up to $4650 of capital gains (minus the dividends they received this year) before incurring any taxes, and I have already done this. But I'm pretty sure it makes sense for me to go beyond that and realize more of these gains so they can pay the taxes now at a much lower rate than they would otherwise incur in the future. e.g. If I go ahead and realize a gain of $12950, then they should owe taxes of ($12950-$4650)*0.15=$1245, which is a savings of over $2000 over what they would pay in taxes on that amount at a rate of 39.6%. It seems like a no brainer for me but I wanted to see if I'm missing something. Are other people doing this?
This is pretty much the right thing to do. Up to $4850 LTCG is taxed at 0% this year. But the part about going up to 12950 may not be right, because either way (this year or next) it would be in the 15% bracket at this amount (unless parents' income is over about 500k).

The repeal seems to hurt kids with LTCG/QDiv income of up to ~5k range, but helps kids who have the other kinds of unearned income in the >12k range. I think for the often mentioned cases (grad students and children of Gold Star families), articles would make the comparison of the parents' 12%/22% bracket vs the trust's 37% bracket. None of the articles bothered to investigate how many families of each category were actually affected though (nor the total tax difference). Also, the repeal does hurt both sets of families in that filing is more complicated again (eg. for the OP who has 3 kids).

btw, the info about NIIT doesn't sound right. NIIT is always tied to the individual's return, so the kid would have to be over the 200k threshold to owe NIIT. I.e. NIIT is not owed this year on income just over the 12k trust tax bracket, nor is it owed next year just because the parents are over their 250k threshold.

(Finally, I wonder if they could have just stuck more unearned income categories onto Form 8814 and allowed the parents to decide whether to use their tax rates or the trust rates.)
I hope the $4,850 LTCGs/QDIVs threshold is correct.

I went ahead today and realized these amounts in my children's UTMA accounts.
seymore92
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Re: Kiddie Tax Changes and UTMA Accounts

Post by seymore92 »

Has TurboTax or other tax software yet updated for the elective option of trust tax rates or parent tax rate for 2019?

I updated today and the amount due for one of my children's returns (only unearend income) decreased a little and I'm trying to track what caused it.
Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

I don't see how. To my knowledge the IRS has not issued any guidance on the election and has not updated Form 8615 Instructions. It still solely refers to trust tax brackets.
fuddbogle
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Re: Kiddie Tax Changes and UTMA Accounts

Post by fuddbogle »

Spirit Rider
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Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

fuddbogle wrote: Tue Jan 14, 2020 10:32 pm The latest, I believe:

https://www.forbes.com/sites/leonlabrec ... baf10d106d
There is nothing new in that link. It is simply restating what was known shortly after the budget bill with the SECURE Act was signed into law.

It also continues this false narrative about how this change was a "fix". Nothing could be further from the truth. The trust tax brackets benefited the vast majority of people. The beneficial cases they and other media have pressed are the exception, not the rule.
seymore92
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Re: Kiddie Tax Changes and UTMA Accounts

Post by seymore92 »

Spirit Rider wrote: Tue Jan 14, 2020 10:56 pm
fuddbogle wrote: Tue Jan 14, 2020 10:32 pm The latest, I believe:

https://www.forbes.com/sites/leonlabrec ... baf10d106d
There is nothing new in that link. It is simply restating what was known shortly after the budget bill with the SECURE Act was signed into law.

It also continues this false narrative about how this change was a "fix". Nothing could be further from the truth. The trust tax brackets benefited the vast majority of people. The beneficial cases they and other media have pressed are the exception, not the rule.
The draft instructions for Form 8615 was just published

https://www.irs.gov/pub/irs-dft/i8615--dft.pdf

Some choice quotes:

"Election to modify the tax on your unearned income.
Recent legislation has modified for 2019 (and retroactively for
2018) the rules related to the tax for certain children who have
unearned income to allow you to elect to calculate your tax
based on the tax rate of your parent. For tax year 2019, you can
elect this alternative application for the tax on your unearned
income. You will complete Form 8615 differently depending on
your election. See the instructions for Part II Tax, later, for more
information.
If you make this election for 2019, include a statement with
your return specifying “election to modify tax of unearned
income.” The statement can be made on the return (for example,
on line 7 or at the top of Form 8615) or on an attachment filed
with the return."


"Part II Tax
You will complete Part II of Form 8615 differently if you elect to
apply the tentative tax based on the tax rate of your parent. If you
elect this option, go to the 2019 Tentative Tax Based on the Tax
Rate of Your Parent Worksheet for details on how to figure your
tax using this method.
If you are figuring your tax based on the brackets and rates
for estates and trusts, see the instructions below for line 6 and
line 7."
inbox788
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Re: Kiddie Tax Changes and UTMA Accounts

Post by inbox788 »

1) Following up on 2019 and planning on 2020. Just did child tax on 10k gains (only {unearned} income) and paid $800 in taxes. Does it sound about right? I did not have to provide any parent information, but probably will need to in 2020.
[First $1100 untaxed, next $1100 - child rate 0% QDI, LTCG, 10% non QDI (DIVIDENDS!), next Trust rate $2650 10% income, 0% CG - so aside from dividends, first $4850 LTCG is 0%; $2650 - 12,950 (10,300) @ 15% -- (10k - 4850)@15%=$772.50]

2) California estimated tax was very different than I had expected, and they asked for parent data (Is there an alternative choice like the federal changes that the tax software isn't doing correctly?). My 2019 isn't complete, so I used prior year information and got $500, when I originally guesstimated $100 and later $750 [9.3% * (10k - 2200)].

3) From what I'm reading, looks like $2200 is the limit for 2020, and any amount above that isn't different from parent rate. Also, putting the child's unearned income on the parent form loses this lower bracket benefit, so a separate tax for is still required. I wonder if the parent information isn't used, whether they (IRS or tax software) will insist on collecting it. Might give me an incentive to stay under $2200 instead of going over a little to capture the whole amount, in hopes of administrative simplification and independently competing child return without waiting for the parent return.
[Form 3800 - Joint Parents use Name/SS First Listed! Part 1 - if line 5 less than 0, don't need Part 2 - Tentative tax based on parents!]
LincolnTunnel wrote: Mon Dec 30, 2019 12:18 pm Does anyone know how this works with respect to state income taxes? I live in NJ.
How did it turn out? Did NJ follow the Fed rules? I'm guessing it should be the parent tax rate (usually 5-6% up to 9%) on the amount above the 2200 exemptions, but I'm looking for those specific limits/thresholds on the state side right now.

https://smartasset.com/investing/capita ... calculator
davel316
Posts: 24
Joined: Fri Sep 04, 2015 10:01 pm

Re: Kiddie Tax Changes and UTMA Accounts

Post by davel316 »

Hello. Last year (or maybe 2018), Spirit Rider provided me with the great info about being able to realize $4850 in UTMA account as long term cap gain (LTCG), resulting in no federal tax on that amount. Now I see folks talking about it reverting in 2020. So, can somebody tell me how much cap gain is allowed in 2020 in the UTMA where there is still no federal tax due? I saw an earlier post that mentioned $2200. Is that the right amount for this year (2020)? This is unfortunate news since I was planning to use the $4850 cap gain this year for multiple kids. Is there any new strategy, or is just a straight reduction to only being able to realize the smaller amount from now on? Thanks in advance.
SnowBog
Posts: 471
Joined: Fri Dec 21, 2018 11:21 pm

Re: Kiddie Tax Changes and UTMA Accounts

Post by SnowBog »

davel316 wrote: Tue Aug 04, 2020 10:35 pm Now I see folks talking about it reverting in 2020. So, can somebody tell me how much cap gain is allowed in 2020 in the UTMA where there is still no federal tax due? I saw an earlier post that mentioned $2200. Is that the right amount for this year (2020)?
That's my understanding. The SECURE Act last year ended the stretch IRA, and reverted the "kiddie tax" to the 2018 levels (before the changes with the tax reforms).

So unfortunately, we only had two years (2018 + 2019) with the expanded kiddie tax range.

For me personally, I'm attempting to "adapt" by using shares with less gains. For example, let's say in 2019 I transferred in $5k of shares with gains of say $4500. If I want to grow the account by another $5k this year, I'll transfer in $5k of shares with roughly $2k of gains (leaving room for dividends).
Spirit Rider
Posts: 13644
Joined: Fri Mar 02, 2007 2:39 pm

Re: Kiddie Tax Changes and UTMA Accounts

Post by Spirit Rider »

The Kiddie Tax on amounts > $2200 (2020) has reverted back to the parent's rate.

As pointed out by @SnowBog, that is the tax free limit unless the parent's taxable income has space in the 0% capital gains tax rate bracket. For 2020 this $40K single and $80K MFJ.

While this is less likely for Boglehead parent's, it might be a little more likely for Boglehead grandparents. Other than that, I am not aware of any other way for dependents to have more than $2200 in tax free unearned income.
davel316
Posts: 24
Joined: Fri Sep 04, 2015 10:01 pm

Re: Kiddie Tax Changes and UTMA Accounts

Post by davel316 »

Thanks so much for the info, even if it is a bummer. So, I guess I should ask this now: might the rules change in 2021, or is the $2200 limit here to stay for all years forward until some future tax law change?
Grt2bOutdoors
Posts: 23151
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Kiddie Tax Changes and UTMA Accounts

Post by Grt2bOutdoors »

davel316 wrote: Fri Aug 07, 2020 1:49 pm Thanks so much for the info, even if it is a bummer. So, I guess I should ask this now: might the rules change in 2021, or is the $2200 limit here to stay for all years forward until some future tax law change?
Don’t bank on the future, use what you know today to make your decision. I’ve used an UTMA for quite some time now, based on that I’d tell you chances of a beneficial change is not likely other than for limits to be inflation adjusted as current law permits.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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