UGMA

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ljez
Posts: 5
Joined: Sat Oct 25, 2008 9:03 pm

UGMA

Post by ljez »

I have a UGMA set up for both both son and daughter (Ages 14 and 12). I have had them open and invested in Vanguard Star since birth (Originally because of the low cost to open). As they get older and start to near the ages they can use them (College, Car?) I was wondering if I should start switching accounts to reset the cost basis. I am thinking I would like to stay around the 60/40 allocation so was thinking of moving money to Vanguard Lifestrategy Moderate Growth fund.

From what I can see if I keep their Capital Gains, Interest and Dividends under $2,200 for the year they will owe no taxes correct? This means I won't have to report it?

And can I do a transfer to avoid being out of the market any amount of time?

I hope to do this over the next few years to eliminate some of the taxes they may see going forward when they get ready to use the funds.

Thanks in advance.
RetiredAL
Posts: 992
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: UGMA

Post by RetiredAL »

You have to file a tax return ( report ) if more than a little bit above $1000.

See the wiki for the exact dollar amounts.

edit: here's the wiki link: https://www.bogleheads.org/wiki/Kiddie_tax
Topic Author
ljez
Posts: 5
Joined: Sat Oct 25, 2008 9:03 pm

Re: UGMA

Post by ljez »

Thank you. So if I am reading that right, up to $1100 I don't have to file and no taxes are due. Up to $2200 with having to file, but still no taxes due.

They have never had more than a few hundred dollars of dividends and interest. So if they have up to the $2,200 so I report that on my taxes somehow? Does tax software usually walk you through something like that (Taxcut?)
RetiredAL
Posts: 992
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: UGMA

Post by RetiredAL »

You want to periodically harvest the LT Gains while staying under the $2200 income total for that year, otherwise years from now there will be a large tax bill related to the large cap gain on what you just sold to pay for their school.

This last Dec, I booked $2000+ of gains and dividends for each of my Grand-kids with zero tax due.
Spirit Rider
Posts: 13512
Joined: Fri Mar 02, 2007 2:39 pm

Re: UGMA

Post by Spirit Rider »

ljez wrote: Fri May 15, 2020 7:26 pm I have a UGMA set up for both both son and daughter (Ages 14 and 12). I have had them open and invested in Vanguard Star since birth (Originally because of the low cost to open). As they get older and start to near the ages they can use them (College, Car?) I was wondering if I should start switching accounts to reset the cost basis. I am thinking I would like to stay around the 60/40 allocation so was thinking of moving money to Vanguard Lifestrategy Moderate Growth fund.

From what I can see if I keep their Capital Gains, Interest and Dividends under $2,200 for the year they will owe no taxes correct? This means I won't have to report it? And can I do a transfer to avoid being out of the market any amount of time? I hope to do this over the next few years to eliminate some of the taxes they may see going forward when they get ready to use the funds.
Odds are you have a UTMA account and not a UGMA account. With the exception of South Carolina and Vermont all the other states adopted the UTMA in the late 90s. Vermont adopted the UTMA in 2015, leaving South Carolina as the only holdout.

Note: The $2200 (2020) Kiddie Tax limit is the total amount subject to taxation at the dependent's unearned income standard deduction and tax rates. The unearned income standard deduction starts at $1100 (2020) with no earned income, reduces to $1100 - (earned income up to $700) down to $350 and can reduce to $0 when approaching the earned income standard deduction (2020 = $12,400). Unearned ordinary income (interest, non-qualified dividends, etc...) > the unearned income standard deduction ($1100 -> $350 -> $0) up to $2200 is taxed at 10%. Only unearned income <= the unearned income standard deduction and capital gains are tax-free.

Tax filing is required for total unearned income >= $1100 even if no tax is due.

You generally can do an exchange within the same fund family. Both the sell order and buy order will happen at the mutual fund prices at the end of that day.

The unearned income standard deduction will decrease to $350 once they have any earned income >= $700/year. This might happen on average by age 15 -17. You will want to do the maximum tax gain harvesting possible. You will want to track specific lot IDs, so you can keep a rolling reset of cost basis such that you can minimize any capital gains when selling for income.
sixty40
Posts: 288
Joined: Sat Dec 06, 2014 11:53 am

Re: UGMA

Post by sixty40 »

ljez wrote: Fri May 15, 2020 7:26 pm I have a UGMA set up for both both son and daughter (Ages 14 and 12). I have had them open and invested in Vanguard Star since birth (Originally because of the low cost to open). As they get older and start to near the ages they can use them (College, Car?) I was wondering if I should start switching accounts to reset the cost basis. I am thinking I would like to stay around the 60/40 allocation so was thinking of moving money to Vanguard Lifestrategy Moderate Growth fund.

From what I can see if I keep their Capital Gains, Interest and Dividends under $2,200 for the year they will owe no taxes correct? This means I won't have to report it?

And can I do a transfer to avoid being out of the market any amount of time?

I hope to do this over the next few years to eliminate some of the taxes they may see going forward when they get ready to use the funds.

Thanks in advance.
I contributed to my child's UTMA account last year by gifting him some shares of VGHAX (VG health care fund) which I did not want anymore, with an unrealized gain of about $2900, and which I sold in his account and bought some VTSAX (VG total stk mkt). With some dividends his total taxable income was around $3100 (all unearned) and he paid no fed income tax but had to pay CA state income tax of around $200 (of course CA wants their money even though no fed tax). I remember researching this and the IRA allows up to around $4700 of unearned income w/o any taxes. My notes are;
- Up to $1050 no tax (0% tax rate)
- Next $3650 no tax (0$ tax rate) if all LTCG or Qualified Dividend

Your UTMA acct with an "unearned" $2200 taxable income should not have any fed taxes. And any unearned income above $1100 will need to file.
Spirit Rider
Posts: 13512
Joined: Fri Mar 02, 2007 2:39 pm

Re: UGMA

Post by Spirit Rider »

sixty40 wrote: Sat May 16, 2020 9:42 am I remember researching this and the IRA allows up to around $4700 of unearned income w/o any taxes. My notes are;
- Up to $1050 ($1100 for 2019, provided no earned income) no tax (0% tax rate)
- Next $3650 no tax (0$ tax rate) if all LTCG or Qualified Dividend
The above was under new Kiddie Tax rules enacted in the TCJA and only applied for 2018 and 2019. This was repealed for tax years starting with 2020 and was made retroactively optional for 2018 and 2019 in the SECURE Act
Your UTMA acct with an "unearned" $2200 taxable income should not have any fed taxes, only if unearned ordinary income is <= the unearned income Standard Deduction ($1100 -> $0 depending on earned income). And any unearned income above $1100 will need to file.
sixty40
Posts: 288
Joined: Sat Dec 06, 2014 11:53 am

Re: UGMA

Post by sixty40 »

Spirit Rider wrote: Sat May 16, 2020 10:54 am
sixty40 wrote: Sat May 16, 2020 9:42 am I remember researching this and the IRA allows up to around $4700 of unearned income w/o any taxes. My notes are;
- Up to $1050 ($1100 for 2019, provided no earned income) no tax (0% tax rate)
- Next $3650 no tax (0$ tax rate) if all LTCG or Qualified Dividend
The above was under new Kiddie Tax rules enacted in the TCJA and only applied for 2018 and 2019. This was repealed for tax years starting with 2020 and was made retroactively optional for 2018 and 2019 in the SECURE Act
Your UTMA acct with an "unearned" $2200 taxable income should not have any fed taxes, only if unearned ordinary income is <= the unearned income Standard Deduction ($1100 -> $0 depending on earned income). And any unearned income above $1100 will need to file.
I was not aware of the 2020 changes, I was thinking of doing something similar for 2020 but now have to do some research
Spirit Rider
Posts: 13512
Joined: Fri Mar 02, 2007 2:39 pm

Re: UGMA

Post by Spirit Rider »

sixty40 wrote: Sat May 16, 2020 11:31 am
Spirit Rider wrote: Sat May 16, 2020 10:54 am
sixty40 wrote: Sat May 16, 2020 9:42 am I remember researching this and the IRA allows up to around $4700 of unearned income w/o any taxes. My notes are;
- Up to $1050 ($1100 for 2019, provided no earned income) no tax (0% tax rate)
- Next $3650 no tax (0$ tax rate) if all LTCG or Qualified Dividend
The above was under new Kiddie Tax rules enacted in the TCJA and only applied for 2018 and 2019. This was repealed for tax years starting with 2020 and was made retroactively optional for 2018 and 2019 in the SECURE Act
Your UTMA acct with an "unearned" $2200 taxable income should not have any fed taxes, only if unearned ordinary income is <= the unearned income Standard Deduction ($1100 -> $0 depending on earned income). And any unearned income above $1100 will need to file.
I was not aware of the 2020 changes, I was thinking of doing something similar for 2020 but now have to do some research
The amount > the Kiddie Tax limit (2020 = $2200), reverts back to being taxed at the parent's marginal tax rates. It doesn't prevent tax gain harvesting. You just lose the additional trust 0% capital gains tax bracket.
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