2018 UTMA tax gain harvesting

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mogg
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2018 UTMA tax gain harvesting

Post by mogg » Sun Aug 12, 2018 12:14 pm

Can you verify my understanding of UTMA tax rules? I'd like to harvest maximum gains in my kid's UTMA account without paying taxes. Hypothetically, assume the UTMA has:

$500 ordinary dividends for 2018
$20,000 unrealized long term capital gains that I can harvest over 15 years

My understanding of the 2018 kiddie tax rules is:
$1,050 - untaxed standard deduction
$1,050 - tax at child's tax rate, 0% for long term capital gains
0 to $2,599 - 0% Trust Tax Rate On Capital Gains & Qualified Dividends

So it seems that the UTMA can potentially have income of $1,050 + $1,050 + $2,599 = $4,699 without owing any tax.

To maximize the tax harvest in the UTMA, can the UTMA realize $4,699 - $500 (dividends) = $4,199 in long term capital gains in 2018 without paying any tax?

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FiveK
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Re: 2018 UTMA tax gain harvesting

Post by FiveK » Sun Aug 12, 2018 12:25 pm

Without having the actual 2018 form 8615 available, what you describe appears correct. E.g., 2018 Kiddie Tax Rules And Rates and The ‘kiddie tax’ is getting easier (and maybe cheaper) under the new tax law - MarketWatch.

mogg
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Re: 2018 UTMA tax gain harvesting

Post by mogg » Sun Aug 12, 2018 10:41 pm

Thanks FiveK!

Spirit Rider
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Re: 2018 UTMA tax gain harvesting

Post by Spirit Rider » Sun Aug 12, 2018 11:11 pm

Two points.

I don't know why you are stopping at $2599 and $4699. The 15% LTCG and QDIV rate bracket starts at $2,600. That means $2600 is taxed at the first bracket rates, not $2599.

Also, it is not as simple as a $1050 deduction and $1050 taxed at the child's rate. There are pro-rata worksheets for Line 5 in the Form 8615 instructions. These may or may not change the taxes depending on circumstances.

mogg
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Re: 2018 UTMA tax gain harvesting

Post by mogg » Mon Aug 13, 2018 7:32 am

Thanks Spirit Rider!

I read from previous posts that there are pro-rata rules, but assumed that as long as dividend income is under the standard deduction then the standard deduction would consume all of the dividend income. I guess I'll have to wait for the new 2018 before doing further tax planning.

davel316
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Re: 2018 UTMA tax gain harvesting

Post by davel316 » Sat Sep 22, 2018 4:00 pm

"So it seems that the UTMA can potentially have income of $1,050 + $1,050 + $2,599 = $4,699 without owing any tax."

I am having a hard time verifying that. There are plenty of sites that say that UTMA long term cap gains will be subject to the Trust and Estates tax table (0% for long term cap gain up to $2600) under the new Trump tax plan (Tax Cut and Jobs Act). But, those sites don't seem to say that the $2600 is on top of the first $2100 of long term cap gains being tax free.

Spirit Rider
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Re: 2018 UTMA tax gain harvesting

Post by Spirit Rider » Sat Sep 22, 2018 5:12 pm

Don't rely on websites. Go to the source read the 2018 draft IRS Form 8615 and Instructions.

davel316
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Re: 2018 UTMA tax gain harvesting

Post by davel316 » Sat Sep 22, 2018 10:27 pm

Thank you. I just looked at the draft 8615. It does subtract the first $2100 of unearned income. After that, it was very hard to follow as it referred to multiple worksheets. On the draft 1040, it adds in cap gains via the draft Schedule 1. So, what form do the cap gains actually end up getting taxed at 0% ? I thought I would be able to figure it out, but I can't seem to find where the cap gains calculation is that would do the 0% for the extra $2600 in cap gain, so any help would be appreciated.

davel316
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Re: 2018 UTMA tax gain harvesting

Post by davel316 » Sat Sep 22, 2018 11:07 pm

I took another look at the draft 8615. It says to subtract $2100 from the total unearned income and to STOP if the result is less than 0. But, if the result is greater than 0 (meaning the unearned income is more than $2100), then the form wants you to figure the tax on the amount on line 4.

But line 4 is the amount of income from the 1040, which would appear to be the full amount of the unearned income. Then, the $2600 comes out (I think) when the tax is calculated following the instructions for the Schedule D worksheet. So, from what I see, if the unearned income is greater than $2100, then the 0% cap gains rate applies to the first $2600, but not on top of the $2100. So, the end result would be 0% tax on $2600 in long term cap gain, but not on $4700, as has been stated earlier.

I hope I am wrong, but if so, I'd like somebody to point out how they see it differently on the 8615. Thanks.

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FiveK
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Re: 2018 UTMA tax gain harvesting

Post by FiveK » Sun Sep 23, 2018 1:31 am

davel316 wrote:
Sat Sep 22, 2018 11:07 pm
But line 4 is the amount of income from the 1040, which would appear to be the full amount of the unearned income.
Line 4 of 8615 is the taxable income from 1040, so you would deduct $1050 (in the case of no earned income) from the full amount of the unearned income.

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FiveK
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Re: 2018 UTMA tax gain harvesting

Post by FiveK » Sun Sep 23, 2018 2:34 am

davel316 wrote:
Sat Sep 22, 2018 11:07 pm
So, from what I see, if the unearned income is greater than $2100, then the 0% cap gains rate applies to the first $2600, but not on top of the $2100. So, the end result would be 0% tax on $2600 in long term cap gain, but not on $4700, as has been stated earlier.

I hope I am wrong, but if so, I'd like somebody to point out how they see it differently on the 8615. Thanks.
If all income is from QD & LTCG, Form 8615 line 6 will always be $1050 or less. Let's assume $1050 for simplicity.

Following the instructions for 8615 line 7, line 8 of the QD&LTCG worksheet = Form 8615 line 6 + $2600 = $3650.

As long as taxable income is no more than $3650, tax will be $0. Taxable income = total income - $1050, so total income can be $3650 + $1050 = $4700 if all from QD & LTCG.

If some of the unearned income is from ordinary interest and non-qualified dividends, there can be up to $1050 (the standard deduction) of that income and $3650 of QD & LTCG for $0 tax.

libralibra
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Re: 2018 UTMA tax gain harvesting

Post by libralibra » Sun Sep 23, 2018 12:07 pm

The "What's New" section at the top of the instructions seems to be pretty clear https://www.irs.gov/pub/irs-dft/i8615--dft.pdf

Also, all the pro-rata stuff seems to be gone.

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indexfundfan
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Re: 2018 UTMA tax gain harvesting

Post by indexfundfan » Mon Sep 24, 2018 2:33 pm

Here's an article on Kiddie tax:

https://www.marketwatch.com/story/new-t ... 2018-09-24

It has the same interpretation as discussed: the first $4700 of LTCG or QDI has 0% fed tax rate (no earned income).
My signature has been deleted.

gotlucky
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Re: 2018 UTMA tax gain harvesting

Post by gotlucky » Fri Nov 09, 2018 9:38 am

FiveK wrote:
Sun Sep 23, 2018 2:34 am

If some of the unearned income is from ordinary interest and non-qualified dividends, there can be up to $1050 (the standard deduction) of that income and $3650 of QD & LTCG for $0 tax.
Thank you for this simplification.

If I interpret correctly:

Ordinary interest income in excess of $1050 it will be taxed at the child's 10% rate (up to $2100). QD & LTCG up to $2600 on top of that will still be taxed at 0% rate.

My plan is for my dependent child to realize STCG of $1050 and LTCG of $3650. If this is her only income, there would be no federal tax, correct?

Spirit Rider
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Re: 2018 UTMA tax gain harvesting

Post by Spirit Rider » Fri Nov 09, 2018 10:19 am

gotlucky wrote:
Fri Nov 09, 2018 9:38 am
FiveK wrote:
Sun Sep 23, 2018 2:34 am

If some of the unearned income is from ordinary interest and non-qualified dividends, there can be up to $1050 (the standard deduction) of that income and $3650 of QD & LTCG for $0 tax.
Thank you for this simplification.

If I interpret correctly:

Ordinary interest income in excess of $1050 it will be taxed at the child's 10% rate (up to $2100). QD & LTCG up to $2600 on top of that will still be taxed at 0% rate.

My plan is for my dependent child to realize STCG of $1050 and LTCG of $3650. If this is her only income, there would be no federal tax, correct?
Correct with the caveat that there is no earned income.

Earned income up to $750 reduces the unearned income standard deduction dollar for dollar. Also, earned income > ($12K - $350 = $11,650) reduces the remaining unearned income standard deduction dollar for dollar.

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