Maximizing Tax Advantage of UTMA

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wholeinone04
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Maximizing Tax Advantage of UTMA

Post by wholeinone04 » Mon Apr 30, 2018 12:38 pm

I've got a new baby in the house (3 months old) and am looking to maximize the tax benefit of a UTMA. I am already maxing out all my other retirement accounts, etc and not worried about transferring the account over to him at age 18.

So my goal is really to maximize the $2,100 in tax free capital gains every year. Here's my plan:

First year: Transfer securities (max $14k/year * 2) at end of the year (ie 12/20) with high embedded capital gains - just enough to fill up 0% LTCG space. Sell and re-buy stocks with low/no dividends and interest.

Following years: Realize any short term losses in his account and then transfer short-term gainers from my accounts to sell and offset his losses, ie zero out the short-term gains. Realize long term gains to fill up the 0% space. If he can’t fill up the LTCG space or had net long-term losses, I'll transfer some of my long-term gain positions into their accounts for immediate sale.

This seems like a no-brainer to save around $500/year (or more) in taxes, am I missing something?

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MP123
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Re: Maximizing Tax Advantage of UTMA

Post by MP123 » Mon Apr 30, 2018 1:14 pm

Maximum gift amount without a gift return for 2018 is now $15k up from $14k. Times two for you and your spouse. But that should only help with your plan.

Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Mon Apr 30, 2018 1:30 pm

It is $15K/year for 2018.
The tax reform substituted the trust tax brackets for the parent's marginal rates for purposes of the Kiddie Tax. The first trust tax bracket is 10% ordinary income tax rate up to $2550 and 0% long term capital gains rate up to $2600. This means There 0% capital gains tax rate up to $4700.

However, ordinary income tax is prorated. So if you have any interest, non-qualified dividends and net short term capital gains. A prorated amount will be taxable at 10%. So you want to transfer $4700 - income from the account. This means from a tax perspective you want the UTMA to be invested in that which will throw off the least income an especially the least income subject to ordinary income tax. Vanguard is the obvious choice, because their unique (patented) structure of ETFs as a share class generates the lowest short and long term capital gains.

Short term losses first offset short term gains, but if there are no like losses or gains any loss offsets any gain. So there is no reason to transfer short term losses to the UTMA unless it advantages your account.

mega317
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Re: Maximizing Tax Advantage of UTMA

Post by mega317 » Mon Apr 30, 2018 1:32 pm

wholeinone04 wrote:
Mon Apr 30, 2018 12:38 pm
Following years: Realize any short term losses in his account and then transfer short-term gainers from my accounts to sell and offset his losses, ie zero out the short-term gains. Realize long term gains to fill up the 0% space. If he can’t fill up the LTCG space or had net long-term losses, I'll transfer some of my long-term gain positions into their accounts for immediate sale.
I haven't considered this part of your plan before. I think I would rather not realize any losses in the UTMA, and gift shares with the lowest cost basis rather than newer shares with short-term gains since those will have higher basis later and are more likely to be useful in tax loss harvesting for you.

Also of course you have to consider the implications of a huge UTMA when your child takes over.

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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Mon Apr 30, 2018 1:32 pm

It is $15K/year for 2018.

The tax reform substituted the trust tax brackets for the parent's marginal rates for purposes of the Kiddie Tax. The first trust tax bracket is 10% ordinary income tax rate up to $2550 and 0% long term capital gains rate up to $2600. This means There 0% capital gains tax rate up to $4700.

However, ordinary income tax is prorated. So if you have any interest, non-qualified dividends and net short term capital gains. A prorated amount will be taxable at 10%. So you want to transfer $4700 - income from the account. This means from a tax perspective you want the UTMA to be invested in that which will throw off the least income an especially the least income subject to ordinary income tax. Vanguard is the obvious choice, because their unique (patented) structure of ETFs as a share class generates the lowest short and long term capital gains.

Short term losses first offset short term gains, but if there are no like losses or gains any loss offsets any gain. So there is no reason to transfer short term losses to the UTMA unless it advantages your account.

Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Mon Apr 30, 2018 1:32 pm

It is $15K/year for 2018.

The tax reform substituted the trust tax brackets for the parent's marginal rates for purposes of the Kiddie Tax. The first trust tax bracket is 10% ordinary income tax rate up to $2550 and 0% long term capital gains rate up to $2600. This means added onto the $2100, the 0% capital gains tax rate is up to $4700.

However, ordinary income tax is prorated. So if you have any interest, non-qualified dividends and net short term capital gains. A prorated amount will be taxable at 10%. So you want to transfer $4700 - income from the account. This means from a tax perspective you want the UTMA to be invested in that which will throw off the least income an especially the least income subject to ordinary income tax. Vanguard is the obvious choice, because their unique (patented) structure of ETFs as a share class generates the lowest short and long term capital gains. Total Stock Market has the lowest inherent possabile income, so that is a good long term choice in the UTMA.

Short term losses first offset short term gains, but if there are no like losses or gains any loss offsets any gain. So there is no reason to transfer short term losses to the UTMA unless it advantages your account.

wholeinone04
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Re: Maximizing Tax Advantage of UTMA

Post by wholeinone04 » Mon Apr 30, 2018 6:32 pm

Spirit Rider wrote:
Mon Apr 30, 2018 1:32 pm
It is $15K/year for 2018.

The tax reform substituted the trust tax brackets for the parent's marginal rates for purposes of the Kiddie Tax. The first trust tax bracket is 10% ordinary income tax rate up to $2550 and 0% long term capital gains rate up to $2600. This means added onto the $2100, the 0% capital gains tax rate is up to $4700.

However, ordinary income tax is prorated. So if you have any interest, non-qualified dividends and net short term capital gains. A prorated amount will be taxable at 10%. So you want to transfer $4700 - income from the account. This means from a tax perspective you want the UTMA to be invested in that which will throw off the least income an especially the least income subject to ordinary income tax. Vanguard is the obvious choice, because their unique (patented) structure of ETFs as a share class generates the lowest short and long term capital gains. Total Stock Market has the lowest inherent possabile income, so that is a good long term choice in the UTMA.

Short term losses first offset short term gains, but if there are no like losses or gains any loss offsets any gain. So there is no reason to transfer short term losses to the UTMA unless it advantages your account.
Oh yea good catch on the $15k. And that's interesting/even better then if I can do up to $4,700.

As for the ordinary income tax being pro-rated. If I have let's say $10k in Amazon shares in my taxable account that are now LTCG (basis was $5,300), I can transfer those to the UTMA and sell immediately, which would mean a profit of $4,700. That would all be taxed at 0.

And then you're saying I would want to re-buy something like a vanguard etf that generates no dividends/interest/etc right? I'm confused why the STCG would matter as I could just hold the fund for a year and then any gains become LTCG right?

Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Mon Apr 30, 2018 6:54 pm

When you fill out Form 8615, in the instruction there are one of three worksheets for Line 5 that will prorate all income the dependent has in all accounts. If they exist for the tax year, they will be prorated. There was nothing in the tax reform that should have changed this. We will no for certain later in the year.

I was just pointing out that you are not guaranteed of $0 in taxes. Even if the total unearned income <= $4700.

Note: The Form 8615 Instructions have not been updated for 2018 with the tax reform. So Part II still reflects using the parents marginal tax rate. We will have to wait until the IRS releases an updated one later in the year.

RetiredAL
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Re: Maximizing Tax Advantage of UTMA

Post by RetiredAL » Mon Apr 30, 2018 7:44 pm

wholeinone04....

I do this for my grandson's UTMA each year. By what's been posted here, some have gotten a rude surprise with their now college age child is a facing huge Cap Gain Tax bill at a much higher tax rate than they expected, all because they had not been booking these gains each year when they could have done for avoiding/minimizing taxation.

As stated, the new tax law makes it an even better deal, by the higher $ exclusion floor, and also potentially the tax rate rate, which used to automatically be the parents rate, which is now stepped "Trust Rate".

Do remember that you will likely have to file a tax return for the child each year.

There were several BH threads on Kiddie Tax earlier this year that went over the changes. Just do a search for "Kiddie".

The passage of knowledge and personal experiences like this, to others, is what makes the BH site so valuable.

jjbnyc
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Re: Maximizing Tax Advantage of UTMA

Post by jjbnyc » Tue May 01, 2018 7:26 pm

Spirit Rider and others,

I have reviewed the various posts on the forum about the 2018 kiddie tax (as well as a number of other posts from other websites) and there seems to be a significant amount of conflicting (or at least unclear) information floating around about this particular topic.

Spirit Rider's post seems to say that the first $2,100 of unearned income is tax-free, and that the next $2,600 of LTCG/QDI is subject to 0% tax (assuming total unearned income is $4,700 or less). This is assuming no earned income (which is probably the case for a lot of "kiddies").

However, the bogleheads wiki seems to provide conflicting information (it does not reference the 0% tax bracket for LTCG/QDI up to $2,600 ).

Could someone please clarify (and point me to a more definitive resource, if possible)?

It Spirit Rider is correct, this seems to be a significant improvement in the kiddie tax rules for those who can realize/harvest up to (but not more than) $4,700 per year.

Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Tue May 01, 2018 10:15 pm

jjbnyc wrote:
Tue May 01, 2018 7:26 pm
Spirit Rider and others,

I have reviewed the various posts on the forum about the 2018 kiddie tax (as well as a number of other posts from other websites) and there seems to be a significant amount of conflicting (or at least unclear) information floating around about this particular topic.

Spirit Rider's post seems to say that the first $2,100 of unearned income is tax-free, and that the next $2,600 of LTCG/QDI is subject to 0% tax (assuming total unearned income is $4,700 or less). This is assuming no earned income (which is probably the case for a lot of "kiddies").

However, the bogleheads wiki seems to provide conflicting information (it does not reference the 0% tax bracket for LTCG/QDI up to $2,600 ).

Could someone please clarify (and point me to a more definitive resource, if possible)?

It Spirit Rider is correct, this seems to be a significant improvement in the kiddie tax rules for those who can realize/harvest up to (but not more than) $4,700 per year.
I did not say that the first $ 2100 of unearned income is tax-free. If there is no earned income, there is a $1050 standard deduction, the next $1050 is subject to the child's rate, and the next $2550/$2600 will be subject to the first trust ordinary/capital gains rates. However, the total ordinary income can be subject to prorated treatment which may cause some taxation at a 10% ordinary income tax rate.

The Bogleheads Wiki has not been updated for the trust tax rates, because there is no point in doing so until we have the precise IRS guidance. My information is tentative based on my and other's understanding of the tax reform legislation. The IRS fat lady has not sung.

There is no definitive source until the IRS issues guidance and/or 2018 publications and forms.

jjbnyc
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Re: Maximizing Tax Advantage of UTMA

Post by jjbnyc » Wed May 02, 2018 9:11 am

Thanks Spirit Rider, for your response and also for clarifying my post.

So to recap:

1. Assume no earned income and all unearned income is LTCG or QDI for this example
2. First $1,050 is tax-free due to standard deduction
3. Next $1,050 is subject to child's rate (which would be 0% for LTCG/QDI, given no earned income?)
4. Next $2,600 is subject to trust LTCG/QDI rate of 0%
5. LTCG/QDI over $4,700 would start in the 24% trust tax bracket

Is that your understanding?

I think I understand why you and others see it this way.

I am hopeful that this is true so will be eagerly awaiting the release of the guidance :).

Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Wed May 02, 2018 10:58 am

Correct. This is my understanding if you have only LTCG/QDIV

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indexfundfan
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Re: Maximizing Tax Advantage of UTMA

Post by indexfundfan » Wed May 02, 2018 11:10 am

When would new guidance normally be released? Hopefully before the end of this year?
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Spirit Rider
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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Wed May 02, 2018 12:49 pm

There is no normal this year.

There are enormous complexities introduced by the tax reform. Several provisions were not well thought out about how they would be implemented. The IRS is swamped trying to figure out how to implement some of them.

I don't think the IRS is really worried about people trying to optimize their Kiddie Tax. It wouldn't surprise me if it wasn't one of the last things tackled. Their view might be if they get it done in time for the tax software and instructions be available in time to process returns starting in 2019, their good.

So figure sometime between now and New Year's. We just don't know.

wholeinone04
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Re: Maximizing Tax Advantage of UTMA

Post by wholeinone04 » Sun May 06, 2018 11:26 am

Spirit Rider wrote:
Wed May 02, 2018 10:58 am
Correct. This is my understanding if you have only LTCG/QDIV
What if your child has $350 of earned income? My business paid him this year already.

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Re: Maximizing Tax Advantage of UTMA

Post by Spirit Rider » Sun May 06, 2018 11:41 am

Earned income up to $700 reduces the $1,050 unearned income standard deduction. The leaves $350 (coincidental to your number) unless/until it starts to get phased out at the earned income standard deduction limit (2018 = $12K) - $350.

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