Author Topic: Kiddie Tax Planning  (Read 2613 times)

MooseOutFront

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Kiddie Tax Planning
« on: June 10, 2014, 10:38:20 AM »
My dad bought $12k in stock in my daughter's name when she was born.  Now it's at about $14.5k.  I was thinking about having him tax gain harvest these funds, but the kiddie tax is a consideration.  Looks to me like this will allow her to have a $2000 capital gain tax free, but that anything beyond that gets taxed at my marginal rate just like additional earned income would.  (why the hell wouldn't they hit me at my capital gains rate here?? I digress)

Am I seeing this correctly?  If so would it make more sense to just wait some years (she's 2 now) and tax gain harvest this annually up to the max tax free portion starting when she's like 9 or 10 instead of now in order to save on transaction costs / take advantage of future tax code changes?

nordlead

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Re: Kiddie Tax Planning
« Reply #1 on: June 10, 2014, 11:02:30 AM »
If you wait until 9-10, you could have 14k in LTCG, and be earning another 2k in gains every year. At that point, it could be very hard to bring down the capital gains.

If you do it now, you can keep up with it over time, and you can move the stocks to a broker who will charge no fees (you'd only need a handful of free trades/year) or to a vanguard mutual fund (which are free to buy/sell). Also, by doing it now, you could keep the LTCG low so that if she works as a teen she can easily move it to a Roth IRA.

seattlecyclone

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Re: Kiddie Tax Planning
« Reply #2 on: June 10, 2014, 11:27:46 AM »
My dad bought $12k in stock in my daughter's name when she was born.  Now it's at about $14.5k.  I was thinking about having him tax gain harvest these funds, but the kiddie tax is a consideration.  Looks to me like this will allow her to have a $2000 capital gain tax free, but that anything beyond that gets taxed at my marginal rate just like additional earned income would.  (why the hell wouldn't they hit me at my capital gains rate here?? I digress)

I believe this income would be taxed at your capital gains rate if it is long-term capital gains income. The form for this tax has you calculate your tax on your income plus any income over $2,000 from all of your children, using your standard tax rules.

I would say you should go ahead and harvest $2,000 of gains every year. With $14.5k principal, you're unlikely to keep accruing gains at a rate of more than $2,000/year. And if you do, that's not such a bad thing! The suggestion to transfer the stuff to Vanguard to minimize transaction costs is a good one.

MDM

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Re: Kiddie Tax Planning
« Reply #3 on: June 10, 2014, 11:35:13 AM »
The OP probably knows this (based on the question itself), but for those unfamiliar with "tax gain harvesting" and why/when it can be useful: http://www.bogleheads.org/wiki/Tax_gain_harvesting

MooseOutFront

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Re: Kiddie Tax Planning
« Reply #4 on: June 10, 2014, 11:41:09 AM »
I believe this income would be taxed at your capital gains rate if it is long-term capital gains income. The form for this tax has you calculate your tax on your income plus any income over $2,000 from all of your children, using your standard tax rules.
Interesting.  I need to look into this more because my LTCG rate for 2014 is 0% so I would harvest the whole gain this year if the kiddie part can indeed be taxed at my "marginal" LTCG rate.

And I agree that moving this to a free trade brokerage would be great for the semi-annual trade that we'll need, but my dad has it with his Edward Jones guy (rolls eyes) and I can only affect change here to a certain degree.

MooseOutFront

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Re: Kiddie Tax Planning
« Reply #5 on: June 10, 2014, 01:15:16 PM »
Welp, after carefully going through the actual 8615 form and instructions it does indeed appear that the kiddie tax capital gains get taxed at my own capital gains rate.  That helps make the decision to harvest it all in one transaction easier instead of trying to toe the line on a $2,000 gain limit.  Thanks for pointing that out to me.