529 tax deduction vs kiddie tax gain harvest

[well9boy9]

Let's say I need to save $20K college tuition for my child, and there are two ways to do it,

1. Contribute 20K cash to 529 plan. With 5% state tax deduction, I can save 20K x 5% = $1000.

2. I have an individual stock to unload but there are about 100% cap gain on it. I can gift 20K stock to the kid account and there will be 10K cap gain. The kid can kiddie tax gain harvest of $2600 per year. I am at marginal rate of 15 (LTCG) + 5 (state) + NIIT(3.8) + Child credit loss (5) = 29% rate. This will save 2600 X 29% = $754 per year. It will take 10K/2600 = 4 years to finish the process assuming the stock price stays the same.

529 is easier, but it seems the kiddie tax gain harvest saves more taxes. Did I miss anything?

[pshonore]

Does your state have a max on contributions? For example in CT, a couple gets a deduction for up to 10K, any excess get carried over to a future year.

[aleph0]

529 is easier, but it seems the kiddie tax gain harvest saves more taxes. Did I miss anything?

I'd say the main thing you're leaving out is the ongoing tax-free growth in the 529 if used for qualified purposes. No need to worry about the Kiddie Tax on an ongoing basis with the 529 compared to whatever you reinvest the UTMA proceeds in.

[well9boy9]

Thank you all for the thoughts.

[privateer79]

I think the growth over time is a big factor in favor of direct 529 contribution... although if you're fast you can get '24 and '25 done within the next month or two.... so you can do almost half of the Kiddie harvest in the next 2 months.

in my state you can get a tax credit for contributing to a 529, so my kids (who do the kiddie harvest) kick some money back into their 529 to receive state tax credit... so there might be some additional small advantages to the Kiddie Harvest to explore.


on the other hand, why not both(unless your tight on cash)? UTMA's can be used for kiddo enrichment (just not basic support)... so if you have private school tuition, sports, extracurricular activiities, travel, etc... you can put the kiddie harvest money towards that, and lump sum some other cash into a 529.

[986racer]

I did both. Take a look at Back Door AOTC on how to maximize both