UTMA management question

[Travis]

I started a taxable account for my son last week (age 9). He didn't have enough to go straight into VTSAX so I put him in VLXVX.  It's a retirement fund that is 54% Total Stock Market, 36% International Market, 7% Total Bond, and 3% International Bond.  When the time comes that we want to go all-in on VTSAX I assume it's a sell/buy and a taxable event.  Since I'm the custodian of the account this goes on my taxes, correct?  If we wait until he's 18 and I turn over control to him and THEN we make the fund swap, the taxes will fall on him.  As an 18 year old with almost no income this should show up as a long term capital gain event with little to no taxes, correct?

Someone suggested to me that I just front him the money to get him over the $3000 limit and get it over with now, but I also like the idea of this being something built out of money he's received/earned. Thoughts?

[terran]

I don't know how UTMA taxation works. Once the the stock belongs to him in his own adult account it will be long term as long as it's been owned (by anyone) for at least one year. At that point, the long term capital gains tax rates will apply, so as long as he has under whatever the inflation adjusted equivalent of $39375 + $12000 = $51,375 is at the time from all income sources he won't owe capital gains tax.

You could buy VTI, which is the ETF version of VTSAX. There are no minimums except that you can only buy whole shares, so you need at least the value of 1 share and there will be some spare cash that can't be invested. In some ways, I think that might be better because it might create a more concrete sense of "ownership" in that for every $XX he saves he can buy one share of VTI.

[seattlecyclone]

Once you put the money in an UTMA account it belongs to the kid. You're merely the custodian. Any income is therefore reported on the kid's own tax return, regardless of their age.

[PathtoFIRE]

https://www.irs.gov/publications/p929
https://www.irs.gov/taxtopics/tc553

A dependent under the age of 65 and not blind can have up to $1050 in unearned income (only, more complicated formula if they also have earned income) before they have to file a tax return. Above $1050, parents may be able to report the income under their own tax reporting, if certain criteria are met.

Given what I've read above, I wouldn't start worrying about the kid's taxes until 1) they start earning substantial earned income and/or 2) their portfolio gets above ~$20,000.

[secondcor521]

It's his money.  The fact that you're custodian means you're taking care of the money for him; this is mainly because he is not able to enter contracts because he is a minor.

The sale and purchase would be a taxable event.  It would be reported on his return if the sale generated enough capital gains to require filing a return.  Under some circumstances, you can elect to report his income on your return.  Doing so is arguably "simpler" but usually won't save anything on taxes and may cost you.  See IRS Form 8814 and related instructions.

If you hold the original mutual fund for more than a year, it would be a long term gain (or loss).  The amount of taxes owed would depend on the size of the gain or loss and the tax laws at that time.

[Travis]

https://www.irs.gov/publications/p929
https://www.irs.gov/taxtopics/tc553

A dependent under the age of 65 and not blind can have up to $1050 in unearned income (only, more complicated formula if they also have earned income) before they have to file a tax return. Above $1050, parents may be able to report the income under their own tax reporting, if certain criteria are met.

Given what I've read above, I wouldn't start worrying about the kid's taxes until 1) they start earning substantial earned income and/or 2) their portfolio gets above ~$20,000.

Thanks for the docs. Given that my son is unlikely to have to file taxes before he starts any W2 employment, do you think he'd be better off sticking with the fund I started him on and switching to VTSAX when he meets the $3000 threshold, or switching him over to VTI now?

[seattlecyclone]

You may as well harvest capital gains up to the threshold where he would start owing taxes. This would reset the cost basis up to current levels for free, potentially saving him money on taxes in the future when his income is higher.

[Travis]

You may as well harvest capital gains up to the threshold where he would start owing taxes. This would reset the cost basis up to current levels for free, potentially saving him money on taxes in the future when his income is higher.

Thank you.  I never even considered that aspect.

[EricEng]

You may as well harvest capital gains up to the threshold where he would start owing taxes. This would reset the cost basis up to current levels for free, potentially saving him money on taxes in the future when his income is higher.

This is the best approach.  I'm doing the same for my own children. I transfer stocks to them that have the highest gains and sell them (keeping gains maxed at $2,000 per child a year).  Then I have to submit a tax return for them, both fed and state.  The fed is $0 bill, but the state taxes still hit.