Does Kiddie tax apply to grandchildren gifts?

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Opalmanta
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Does Kiddie tax apply to grandchildren gifts?

Post by Opalmanta » Sat Nov 02, 2019 3:23 pm

Hello,
I am gifting shares of appreciated mutual funds to our nephew who is now 24 to help pay off some of his student loans, and his income this year will qualify him for the 0% LTCG tax rate. We have a grandson who is 20, lives with his parents in PA. They claim him as a dependent on their return, though he files his own return to pay tax on his summer earnings. If we were to gift him appreciated mutual fund shares, would they be subject to the kiddie tax since he is under 24? Thanks!

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grabiner
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by grabiner » Sat Nov 02, 2019 3:38 pm

The kiddie tax applies to a child regardless of the source of the money. If your grandson is a student and is under 24, he uses the kiddie tax rules to pay tax on the capital gain, but not on the amount of the gift.

If his summer earnings are less than the standard deduction, then he can use the standard deduction against $350 of investment income. The next $1100 is taxed at his own 0% rate. Another $2650 is taxed at a 0% rate under the trust tax rules. Thus up to $4100 of long-term gain would be untaxed. The next $10,300 would be taxed at 15%, and anything above that would be taxed at 20%.

If you make the gift now, he can take an untaxed gain by selling some of the shares now, and wait until 2020 to sell the rest of the shares, so you can double the untaxed amount.

In addition, if you give a gift of more than $15,000 (if you are married, you can each give $15,000), you have to file a gift tax return. No tax will be due, but the excess gift reduces your future exemption for estate and gift taxes.
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FiveK
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by FiveK » Sat Nov 02, 2019 4:48 pm

Opalmanta wrote:
Sat Nov 02, 2019 3:23 pm
If we were to gift him appreciated mutual fund shares...
Note that a gift does not cause a step-up in basis. An inheritance does, but not a gift. The recipient will be subject to tax on the same amount of capital gain (when sold) as the giver would be.

livesoft
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by livesoft » Sat Nov 02, 2019 5:25 pm

A gift does not create any tax. :)

Only when the owner sells shares is a capital gain possibly realized. If a grandparent gives shares to a grandchild, then that act does not create any tax. The new owner of the shares (the grandchild) has to sell the shares to possibly create a tax liability.
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Spirit Rider
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by Spirit Rider » Sat Nov 02, 2019 5:43 pm

grabiner wrote:
Sat Nov 02, 2019 3:38 pm
The kiddie tax applies to a child regardless of the source of the money. If your grandson is a student and is under 24, he uses the kiddie tax rules to pay tax on the capital gain, but not on the amount of the gift.

If his summer earnings are less than the standard deduction, then he can use the standard deduction against $350 of investment income. The next $1100 is taxed at his own 0% rate. Another $2650 is taxed at a 0% rate under the trust tax rules. Thus up to $4100 of long-term gain would be untaxed. The next $10,300 would be taxed at 15%, and anything above that would be taxed at 20%.

If you make the gift now, he can take an untaxed gain by selling some of the shares now, and wait until 2020 to sell the rest of the shares, so you can double the untaxed amount.

In addition, if you give a gift of more than $15,000 (if you are married, you can each give $15,000), you have to file a gift tax return. No tax will be due, but the excess gift reduces your future exemption for estate and gift taxes.
A small clarification.

The amount >= $2200 is taxed at trust tax rates. With earned income >= $750 and < $11,850, $2200 - $350 standard deduction = $1850 will be subject to the dependent's 0% capital gains tax rate. Up to $4850 of LTCG/QDIV would be untaxed.

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Peter Foley
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by Peter Foley » Sat Nov 02, 2019 9:49 pm

Are we off by a year in this example or is the source I looked at wrong?

"The kiddie tax only applies to:

children under 19 years of age, and
children aged 19 through 23 who are full-time students and whose earned income does not exceed half of the annual expenses for their support.
A child who turns 20 (or 24) by the end of the tax year is not subject to the kiddie tax."

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Re: Does Kiddie tax apply to grandchildren gifts?

Post by Spirit Rider » Sat Nov 02, 2019 9:58 pm

From the original post, it is reasonable to assume the 20 year old with "summer earnings" is a college student. If so, they are subject to the Kiddie Tax.

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Peter Foley
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Re: Does Kiddie tax apply to grandchildren gifts?

Post by Peter Foley » Sat Nov 02, 2019 10:52 pm

Okay - after rereading the original post.

The 24 year old nephew would not be subject to the kiddie tax on the capital gains if he sold the appreciated shares based on his age.

The 20 year old grandson would only be subject to the tax if he were a student and if he sold enough shares with capital gains that pushed him above the limit as detailed by grabiner. The grandson can spread the sale over a few years and stay under the limit to avoid the tax if the long term capital gains are significant.

Thanks.

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