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UTMA taxes

  •  chrisg202 
    Participant
    Status: Resident
    Posts: 46
    Joined: 01/16/2016
    Earnest refinancing bonus

    I was wondering what tax advantage does the UTMA account carries as compared to a taxable account in my name?

    Are taxes on the UTMA money paid only on the interest and dividends each year? will my son have to pay taxes when withdrawing the money at age of 18?

    Thank you

    #171207 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6110
    Joined: 01/09/2016

    Taxes are paid as incurred annually. There is no deferral with an UTMA, only that the taxes are paid in the minor’s name, not the parents. However, you’ve got to consider “kiddie” tax thresholds – check here to learn more.

    On the whole, I don’t believe the “benefits” of building an UTMA/UGMA over the long term (including estate reduction) override the major problem which, imho, is that you are building an asset that you must transfer to your child upon the age of majority. If you are in a position to worry about asset reduction in regard to estate planning, then you can afford trust planning.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #171220 Reply
     bean1970 
    Participant
    Status: Physician
    Posts: 290
    Joined: 07/12/2017

    it is tax advantaged to a point because kiddie rules apply.  it takes quite a bit of money to have enough unearned income to apply kiddie tax rules…..if the account is hefty from the get-go then  it’s not as advantageous.  2018 tax changes lowered how the account is taxed, particularly in high tax brackets.

    my kid reached age of majority last year, but doesn’t want the account until he is done with college.  This year he will file his own1040 ,but the account hasn’t been relinquished to him because he told me not to.

     

    #171246 Reply
    Liked by chrisg202
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    Notwithstanding Johanna’s legitimate concerns about an UTMA account owner’s right to full control at age of termination.

    “Kiddie Taxes” like non-dependent taxes are only on actual (realized) income. Left alone UTMA accounts can have substantial unrealized capital gains at age of termination or later.

    Under the recent tax reform, UTMA accounts can be more tax efficient when properly administrated by the custodian. For 2018 up to $4700 in UTMA income can be tax-free. This is true when no more than $1050 ($350 if earned income > $700) is ordinary income and the rest is long-term capital gains or qualified dividends.

    If the custodian invests in only tax-efficient broad market equity index funds and tax-gain harvests annually up to the tax-free limits. A modest (mid-five figures) UTMA account could have no unrealized gains and a substantial percentage of larger accounts could be distributed with little to no taxation.

    #171263 Reply
     chrisg202 
    Participant
    Status: Resident
    Posts: 46
    Joined: 01/16/2016

    So if I gift him $3000 this year, I will pay taxes on the gain only (if more than 4700) and not the deposit money $3000
    Is that correct?
    I was thinking of investing only in vanguard total stock index and international total stock (50/50)

    #171273 Reply
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    You will not pay taxes on any gift amounts, only on distributions (dividends and capital gains) and any capital gains on sales. Vanguard typically has little to no capital gains distributions from TSM. I’m not sure about TISM, but there should be a foreign tax credit to mitigate it. That is a reasonable AA for a UTMA.

    #171285 Reply
    Liked by pulmdoc
     chrisg202 
    Participant
    Status: Resident
    Posts: 46
    Joined: 01/16/2016

    You will not pay taxes on any gift amounts, only on distributions (dividends and capital gains) and any capital gains on sales. Vanguard typically has little to no capital gains distributions from TSM. I’m not sure about TISM, but there should be a foreign tax credit to mitigate it. That is a reasonable AA for a UTMA.

    Click to expand…

    Thank you!

    #171320 Reply
     Ds2660 
    Participant
    Status: Physician
    Posts: 28
    Joined: 11/20/2016

    So, for my 5 year old who has $1300 in capital gains, the best thing to do would be harvest $1050 of the gains now, file a tax return, and harvest any remaining gains up to the limit at the end of each year?  hadn’t even thought about that!

    #171493 Reply
    Liked by q-school
     Bmac 
    Participant
    Status: Physician
    Posts: 215
    Joined: 10/21/2017

    No reason not to harvest all $1300 in gains this year, provided no earned income and all dividends are qualified (and less than 4700-1300).

    #171517 Reply

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