Taxes on one-time special dividend

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Loyalnine
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Taxes on one-time special dividend

Post by Loyalnine » Sun Mar 29, 2020 6:14 pm

I have a question about paying estimated taxes on a large one-time special dividend. I own shares in a family business that is declaring a large one-time special dividend - my portion will be worth around $200K. Usually the dividends are so small that I haven't had to pay estimated taxes.

Not sure if these details are relevant, but here is some additional context:
- We plan to donate around $70K this year
- 2019 total HH income was around $300K
- 2020 total HH income is projected to be around $340K before the special dividend (and obviously around $540K with the special dividend)

That said, I have a few questions:
1) Children's portion - Technically I received around $180K, and each of my two (minor) children received $8K (deposited to a joint account I hold with my wife). Should I be filling out a tax return for them? Or just counting this as part of our HH income?
2) Federal tax rate - Is the relevant federal tax rate 15%? Based on my research, since this is a qualified dividend, it's taxed like long-term capital gains. While our gross HH income with the dividends will be around $540K, per the below we're planning to have around $70K in donations this year alone. So, I'm assuming I fall into the "$78,751 to $488,850" Married Filing Jointly 15% bracket for this income, correct?
3) State tax rate - My state (PA) has a flat tax of 3.07%. I assume that's the tax rate I'll pay on this as well, correct?

Just trying to ensure I do this the right way - thanks for any help or guidance you can give! Based on the answers from a prior post, I'm planning to pay all of the estimated taxes in my Q1 estimated payment (and nothing in Q2-Q4).

DWNY
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Re: Taxes on one-time special dividend

Post by DWNY » Sun Mar 29, 2020 6:40 pm

It sounds like you have taxes withheld from your other income and are considering estimated tax for this special dividend. If you have withholding I'd suggest meeting the safe harbor rule by withoding enough to meet 110% ( based on your income level) of your 2019 tax liability. Then deal with the additional tax next year when you do your taxes.

boomer_techie
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Re: Taxes on one-time special dividend

Post by boomer_techie » Sun Mar 29, 2020 6:43 pm

Loyalnine wrote:
Sun Mar 29, 2020 6:14 pm
2) Federal tax rate - Is the relevant federal tax rate 15%? Based on my research, since this is a qualified dividend, it's taxed like long-term capital gains. While our gross HH income with the dividends will be around $540K, per the below we're planning to have around $70K in donations this year alone. So, I'm assuming I fall into the "$78,751 to $488,850" Married Filing Jointly 15% bracket for this income, correct?
There's also the 3.8% NIIT (Net Investment Income Tax). For you, it has a threshold of $250K. Consult form 8960 and its instructions.

HomeStretch
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Re: Taxes on one-time special dividend

Post by HomeStretch » Sun Mar 29, 2020 7:02 pm

For such a specific transaction, you may be better off seeking expert tax advice.

Did the family business managers consult with a tax advisor before declaring a special dividend? If so, the tax advisor sometimes provides advice to the recipients regarding the U.S. federal and state tax consequences of the special dividend.

Katietsu
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Re: Taxes on one-time special dividend

Post by Katietsu » Sun Mar 29, 2020 9:57 pm

I am going to assume that this “special dividend” is treated like a standard qualified dividend be it from the family business or from Bank of America. I agree that you should verify this with the professional directing this.

1) The children will each need their own return. They will be subject to a “kiddie” tax. (I am not sure if it is appropriate to deposit the children’s checks into your account. I would not but I will let someone else address that.)

2) I would plan on paying 18.8% federal taxes (15% tax rate on qualified dividends plus 3.8% NIIT.)

3) PA taxes are flat rate for all income categories that are taxed. So the tax rate will be 3.04% as you state.

4) Take advantage of the safe harbor rules by paying 110% of 2019 tax liability through withholding or timely estimated payments. For PA, the safe harbor rules require paying 100% of tax liability through withholding or timely estimated payments.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Mon Mar 30, 2020 5:37 am

DWNY wrote:
Sun Mar 29, 2020 6:40 pm
It sounds like you have taxes withheld from your other income and are considering estimated tax for this special dividend. If you have withholding I'd suggest meeting the safe harbor rule by withoding enough to meet 110% ( based on your income level) of your 2019 tax liability. Then deal with the additional tax next year when you do your taxes.
I thought about it, but I’m nervous that I’ll screw the math up. I don’t know exactly how much will be withheld from my job. I’m not predicting any job loss, but what happens if I do? Won’t I then be screwed if I haven’t had enough withheld? Or can I make it up with estimated payments later?

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Mon Mar 30, 2020 5:39 am

HomeStretch wrote:
Sun Mar 29, 2020 7:02 pm
For such a specific transaction, you may be better off seeking expert tax advice.

Did the family business managers consult with a tax advisor before declaring a special dividend? If so, the tax advisor sometimes provides advice to the recipients regarding the U.S. federal and state tax consequences of the special dividend.
They advised us to get tax guidance. I’m thinking I’d rather err on the side of overpaying rather than pay $1,000 (?) for tax advice. I can afford a fair amount of lost interest for that price.

Gill
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Re: Taxes on one-time special dividend

Post by Gill » Mon Mar 30, 2020 6:01 am

Do you know if this is a fully taxable dividend. Possibly it could be a liquidating dividend being a return of capital.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

SouthernFIRE
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Re: Taxes on one-time special dividend

Post by SouthernFIRE » Mon Mar 30, 2020 6:24 am

Technically, I think you need to be holding your children’s share in a segregated account or at least separately accounting for their money. Perhaps you are, just thought worth noting since you mentioned putting it in a joint account with your wife.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Thu Apr 02, 2020 6:21 am

Gill wrote:
Mon Mar 30, 2020 6:01 am
Do you know if this is a fully taxable dividend. Possibly it could be a liquidating dividend being a return of capital.
Gill
Thanks for the question - it is indeed a fully taxable dividend and not a return of capital.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Thu Apr 02, 2020 6:24 am

SouthernFIRE wrote:
Mon Mar 30, 2020 6:24 am
Technically, I think you need to be holding your children’s share in a segregated account or at least separately accounting for their money. Perhaps you are, just thought worth noting since you mentioned putting it in a joint account with your wife.
Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?

Edit: No I am not planning to, nor have I ever, claimed expenses to offset dividends. This was merely in reference to being able to demonstrate that the dividends are going to benefit the children, which they are. They have generous 529s and are well treated :-)
Last edited by Loyalnine on Fri Apr 03, 2020 6:35 am, edited 1 time in total.

pshonore
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Re: Taxes on one-time special dividend

Post by pshonore » Thu Apr 02, 2020 8:34 am

Loyalnine wrote:
Thu Apr 02, 2020 6:24 am
SouthernFIRE wrote:
Mon Mar 30, 2020 6:24 am
Technically, I think you need to be holding your children’s share in a segregated account or at least separately accounting for their money. Perhaps you are, just thought worth noting since you mentioned putting it in a joint account with your wife.
Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?
Not sure what you mean by child's "expenses" to offset income? They are dependents on your return, correct?

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Thu Apr 02, 2020 9:29 am

Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?

pshonore
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Re: Taxes on one-time special dividend

Post by pshonore » Thu Apr 02, 2020 10:48 am

Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I got the mistaken impression you were using "expenses" to offset the dividends. You probably know they're going to owe some taxes. You may be able to add it to your return, but likely will save money by filing returns for the kids

quantAndHold
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Re: Taxes on one-time special dividend

Post by quantAndHold » Thu Apr 02, 2020 11:07 am

Sometimes professional advice is worth the cost. This is complicated enough and you know little enough about what’s going on that this is one of those times. You can spend days reading up on the applicable law, try to figure it out for yourself, and still get it wrong in an expensive way, or you can pay a specialist for an hour of their time and get it right.
Yes, I’m really that pedantic.

psteinx
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Re: Taxes on one-time special dividend

Post by psteinx » Thu Apr 02, 2020 12:11 pm

You're getting a ~$200K special dividend.

Your current knowledge of the tax situation is almost certainly far off base. (Kids "expenses" do not offset their income. They're not a business.)

Invest the money in getting professional help.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Fri Apr 03, 2020 6:29 am

psteinx wrote:
Thu Apr 02, 2020 12:11 pm
You're getting a ~$200K special dividend.

Your current knowledge of the tax situation is almost certainly far off base. (Kids "expenses" do not offset their income. They're not a business.)

Invest the money in getting professional help.
Poor choice of words on my part. I’m not claiming expenses to offset dividends. See above posts.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Fri Apr 03, 2020 6:32 am

quantAndHold wrote:
Thu Apr 02, 2020 11:07 am
Sometimes professional advice is worth the cost. This is complicated enough and you know little enough about what’s going on that this is one of those times. You can spend days reading up on the applicable law, try to figure it out for yourself, and still get it wrong in an expensive way, or you can pay a specialist for an hour of their time and get it right.
If I could get them to handle a case by the hour I would do it. I’ll reach out and find out. I just wanted to avoid having to pay someone to do my entire return, which I suspect would outweigh the cost of me simply erring on the side of overpaying.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Fri Apr 03, 2020 6:51 am

pshonore wrote:
Thu Apr 02, 2020 10:48 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I got the mistaken impression you were using "expenses" to offset the dividends. You probably know they're going to owe some taxes. You may be able to add it to your return, but likely will save money by filing returns for the kids
Will do - thanks!

Katietsu
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Re: Taxes on one-time special dividend

Post by Katietsu » Fri Apr 03, 2020 8:19 am

Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.

pshonore
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Re: Taxes on one-time special dividend

Post by pshonore » Fri Apr 03, 2020 11:40 am

Katietsu wrote:
Fri Apr 03, 2020 8:19 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.
Parents do not need to provide 1/2 of support to claim a child. Rather the child cannot provide more than half. A sibling or grandparent or any other person related or not, can provide the support and the parent still gets to claim them. A fine nuance of the tax code but nonetheless still true.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Fri Apr 03, 2020 12:46 pm

Katietsu wrote:
Fri Apr 03, 2020 8:19 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.
I will handle more cleanly. For the record, per the quote below the “such low amounts” was in reference to the prior run rate, which was <$1K per year:

“ Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?”

Katietsu
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Re: Taxes on one-time special dividend

Post by Katietsu » Fri Apr 03, 2020 2:24 pm

Loyalnine wrote:
Fri Apr 03, 2020 12:46 pm
Katietsu wrote:
Fri Apr 03, 2020 8:19 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?
I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.
I will handle more cleanly. For the record, per the quote below the “such low amounts” was in reference to the prior run rate, which was <$1K per year:

“ Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?”
Two separate issues:
1) Personally with $8000, I would open an UTMA account for each child. You could then make withdrawals and document the purpose(s) of each withdrawal. Here is instructions for the representative payee for SS. I know it is not your situation but same basic goal. https://www.ssa.gov/kc/rp_fundsrecords.htm

2) In order for you to claim a child as a dependent, that child must provide less than half of their own support. Support does not include savings. You can read about this in IRS Pub 501.

I would open an UTMA account for each. Deposit the check in each respectively. If I wanted to use for short term expenses, I would then spend $4000 from each in 2020 and in 2021, respectively.

Of course, if you live a more upper class lifestyle than me, you might have no trouble showing that over $32,000 of total support was spent your kids. I tend to look for the easiest way to approach these things.

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Tue Apr 14, 2020 6:45 am

Katietsu wrote:
Fri Apr 03, 2020 2:24 pm
Loyalnine wrote:
Fri Apr 03, 2020 12:46 pm
Katietsu wrote:
Fri Apr 03, 2020 8:19 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?

I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.
I will handle more cleanly. For the record, per the quote below the “such low amounts” was in reference to the prior run rate, which was <$1K per year:

“ Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?”
Two separate issues:
1) Personally with $8000, I would open an UTMA account for each child. You could then make withdrawals and document the purpose(s) of each withdrawal. Here is instructions for the representative payee for SS. I know it is not your situation but same basic goal. https://www.ssa.gov/kc/rp_fundsrecords.htm

2) In order for you to claim a child as a dependent, that child must provide less than half of their own support. Support does not include savings. You can read about this in IRS Pub 501.

I would open an UTMA account for each. Deposit the check in each respectively. If I wanted to use for short term expenses, I would then spend $4000 from each in 2020 and in 2021, respectively.

Of course, if you live a more upper class lifestyle than me, you might have no trouble showing that over $32,000 of total support was spent your kids. I tend to look for the easiest way to approach these things.
This is very helpful - I will do just that. Thanks for the advice!

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Tue Apr 14, 2020 6:45 am

Katietsu wrote:
Fri Apr 03, 2020 2:24 pm
Loyalnine wrote:
Fri Apr 03, 2020 12:46 pm
Katietsu wrote:
Fri Apr 03, 2020 8:19 am
Loyalnine wrote:
Thu Apr 02, 2020 9:29 am
Yes, they are dependents. My reference to expenses was based on the assumption that I needed to be able to demonstrate that the money was going to benefit the children, which feels like a very easy case to make based on such low amounts. Does that make sense?

I would not consider $16000 to be “such low amounts.” You should also be prepared to document that they still meet the support requirements for taxes if you will claim them as dependents. I do recognize that it is unlikely that you will ever have to prove that the money was spent on their behalf or that you still provided more than half of the kids” support. But you should consider handling this is a bit more cleanly.
I will handle more cleanly. For the record, per the quote below the “such low amounts” was in reference to the prior run rate, which was <$1K per year:

“ Thanks - up until now the amounts have been so insignificant (<$1,000/year/child) that I haven’t been worrying about it, as their expenses have well exceeded the amount. Their expenses still exceed the amount now (again, $8K per child) but I want to ensure I do it right. Any suggestions on where I could go to read more?”
Two separate issues:
1) Personally with $8000, I would open an UTMA account for each child. You could then make withdrawals and document the purpose(s) of each withdrawal. Here is instructions for the representative payee for SS. I know it is not your situation but same basic goal. https://www.ssa.gov/kc/rp_fundsrecords.htm

2) In order for you to claim a child as a dependent, that child must provide less than half of their own support. Support does not include savings. You can read about this in IRS Pub 501.

I would open an UTMA account for each. Deposit the check in each respectively. If I wanted to use for short term expenses, I would then spend $4000 from each in 2020 and in 2021, respectively.

Of course, if you live a more upper class lifestyle than me, you might have no trouble showing that over $32,000 of total support was spent your kids. I tend to look for the easiest way to approach these things.
This is very helpful - I will do just that. Thanks for the advice!

Spirit Rider
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Re: Taxes on one-time special dividend

Post by Spirit Rider » Tue Apr 14, 2020 8:48 am

Many parents have understandably
ambivalent feelings about starting UTMA accounts for relatively smaller amounts of money. However, when you start talking about thousand$, the money really needs to be deposited in a UTMA account.

So, not only should the money from these checks be deposited in their UTMA accounts, but any previous checks less any proper amounts as described below.

A UTMA custodian has a fiduciary duta to only spend UTMA assets for the direct benefit of the child. This is irrevocably their money and should not be/have been spent to reimburse family support obligations.

Withdrawals from an UTMA account should only be for specific expenditures above and beyond normal family support obligations. These could be purchases beyond normal gift giving, expenses for extra-curricular activities, etc.. Bottom line the children not the parents should benefit from the children's dividends

While many of these are the basis for legal withdrawals, many parents would consider some of these normal family expenses unless they were trying to drain the account to help qualify for financial aid. Certainly, major expenditures in the hundred$ or thousand$ like electronics, trip to Europe, a vehicle, etc.. clearly are justified withdrawals.

There is no clear IRS guidance, reporting of withdrawals or UTMA police. Just what seems fair and reasonable with regards to the child (not necessarily to the child). I'm thinking more of the parents. Although, final last words; "happy wife/mom happy life."

Topic Author
Loyalnine
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Re: Taxes on one-time special dividend

Post by Loyalnine » Sun Apr 19, 2020 3:29 pm

Spirit Rider wrote:
Tue Apr 14, 2020 8:48 am
Many parents have understandably
ambivalent feelings about starting UTMA accounts for relatively smaller amounts of money. However, when you start talking about thousand$, the money really needs to be deposited in a UTMA account.

So, not only should the money from these checks be deposited in their UTMA accounts, but any previous checks less any proper amounts as described below.

A UTMA custodian has a fiduciary duta to only spend UTMA assets for the direct benefit of the child. This is irrevocably their money and should not be/have been spent to reimburse family support obligations.

Withdrawals from an UTMA account should only be for specific expenditures above and beyond normal family support obligations. These could be purchases beyond normal gift giving, expenses for extra-curricular activities, etc.. Bottom line the children not the parents should benefit from the children's dividends

While many of these are the basis for legal withdrawals, many parents would consider some of these normal family expenses unless they were trying to drain the account to help qualify for financial aid. Certainly, major expenditures in the hundred$ or thousand$ like electronics, trip to Europe, a vehicle, etc.. clearly are justified withdrawals.

There is no clear IRS guidance, reporting of withdrawals or UTMA police. Just what seems fair and reasonable with regards to the child (not necessarily to the child). I'm thinking more of the parents. Although, final last words; "happy wife/mom happy life."
Thanks for the rich detail as always Spirit Rider. What about education savings? I assume adding to their 529s would qualify as proper?

bsteiner
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Re: Taxes on one-time special dividend

Post by bsteiner » Sun Apr 19, 2020 3:39 pm

Did they consider distributing the earnings in 2012 when the top rate on dividends was 15% and the 3.8% net investment income tax didn't yet come into effect, and then electing to be an S corporation?

If any of the shareholders is receiving a sufficiently large amount and would be subject to state income tax at a much higher rate, he/she might want to consider setting up an incomplete gift trust (one that's not a completed gift, is still in the person's estate, but is a separate taxpayer for income tax purposes) in a state such as Delaware, Nevada or South Dakota if that will allow him/her to avoid state income tax in his/her home state. (Since incomplete gift trusts are complicated, the amount involved would have to be substantial.)

Spirit Rider
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Re: Taxes on one-time special dividend

Post by Spirit Rider » Sun Apr 19, 2020 4:47 pm

Loyalnine wrote:
Sun Apr 19, 2020 3:29 pm
Thanks for the rich detail as always Spirit Rider. What about education savings? I assume adding to their 529s would qualify as proper?
Yes, withdrawals from a UTMA account contributed to a UTMA 529 account with the same owner (original minor) would be proper.

Contributed to a 529 account owned by someone else even with the UTMA account owner as beneficiary would not be proper. Because that 529 account owner could change the beneficiary or make non-qualified withdrawals for their own use.

It may be obvious, but just to be aware. A custodian of a UTMA 529 account has no authority to change the beneficiary or make non-qualified withdrawals payable to themselves.

The custodian can only make non-qualified withdrawals payable to the account owner. A change of beneficiary can only occur by and after the account owner assumes control after the age of termination.

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