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UTMA taxes

  •  chrisg202 
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    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 
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    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 
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    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 Tim, chrisg202
     spiritrider 
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    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 
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    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 
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    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 
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    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 
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    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 
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    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
     Ds2660 
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    I’m filing taxes now on turbo tax and got this message:

     

    Tax on Your Child’s Income
    xxxx has a total taxable interest and dividend amount of $1,320.

    The first $1,050 of this income is not taxed.

    The next $1,050 is taxed at 10%, and that $27 of tax will be added to your return.

    Per above discussion, I thought I wouldn’t owe anything.  Anyone have insight?

    This is for my 5 year old who has no earned income.

    #185456 Reply
     bean1970 
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    I’m filing taxes now on turbo tax and got this message:

     

    Tax on Your Child’s Income
    xxxx has a total taxable interest and dividend amount of $1,320. 

    The first $1,050 of this income is not taxed.

    The next $1,050 is taxed at 10%, and that $27 of tax will be added to your return.

    Per above discussion, I thought I wouldn’t owe anything.  Anyone have insight?

    This is for my 5 year old who has no earned income.

    kiddie tax rules. Unearned income up to 1050.  Over taxed at 10%. (For your amount)  For those of us in high brackets this is wayyyyyy better than previous where it was taxed at our marginal rate of 39%

    #185895 Reply
     Bmac 
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    Hmm. Is it possible that TurboTax has the new UTMA rules incorrect?

    #185898 Reply
     spiritrider 
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    @ds2660 you misunderstood the previous posts.

    On $1320 of interest and non-qualified distributions, $27 in taxes is correct. $1320 – $1050 = $270 * 10% = $27.

    Here are the 2018 numbers.

    With no earned income, the first $1050 is a standard deduction and tax-free.

    The next $1050 is taxed at the dependent’s tax rate:

    • 10% on up to $1050 of interest, non-qualified dividends, etc…
    • 0% on the remainder of $1050 in capital gains and qualified dividends

    Then the applicable trust tax rates apply:

    • 10% on up to $2550 of interest, non-qualified dividends, etc…
    • 0% on the remainder of $2600 in capital gains and qualified dividends

    You can have up to $4700 in unearned income and pay no taxes, but only if you have no more than $1050 in ordinary income.

    Reminder to self, stop using tags from your cell phone, they do not work with this forum software.

    #185920 Reply
    Liked by ENT Doc
     Ds2660 
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    I don’t have my tax form in front of me but almost all of the $1320 is LTCG and qualified dividends.  The only selling I have ever done from the account  was tax gain harvesting from vanguard S&P into TSM this past December after reading this thread.  $27 in taxes is not a big deal but either I don’t understand the law (likely), TT is incorrect(possible) or spiritrider is incorrect (unlikely).

    #186005 Reply
     Bmac 
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    I don’t have my tax form in front of me but almost all of the $1320 is LTCG and qualified dividends.  The only selling I have ever done from the account  was tax gain harvesting from vanguard S&P into TSM this past December after reading this thread.  $27 in taxes is not a big deal but either I don’t understand the law (likely), TT is incorrect(possible) or spiritrider is incorrect (unlikely).

    Click to expand…

    I’m as confused as you are, Ds2660. Based on a lengthy thread on Bogleheads last year and confirmed by my accountant, as well as the fact that the $1320 is apparently not ordinary income, my understanding is that the UTMA should be taxed at 0% in this situation. So I’m still suspicious about TurboTax. See quotes below. I can’t figure out how to link to the specific thread.

     

    Re: Tax Reform – Revised Kiddie Tax

    Post by Bmac » Sun Dec 02, 2018 10:18 am

    Ok. So please help me with the math. If my child has 0 earned income, $900 Short Term Capital Loss and $4000 in Qualified Dividends in UTMA, how much LTCG can we take and remain at the 0% tax rate for 2018 under the new rules?
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    grabiner

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    Re: Tax Reform – Revised Kiddie Tax

    Post by grabiner » Sun Dec 02, 2018 10:43 am

    Bmac wrote:

    Sun Dec 02, 2018 10:18 am

    Ok. So please help me with the math. If my child has 0 earned income, $900 Short Term Capital Loss and $4000 in Qualified Dividends in UTMA, how much LTCG can we take and remain at the 0% tax rate for 2018 under the new rules?

    The first $1050 of income is not taxed at all, because of the standard deduction.

    The next $3650 of income is taxed, but the tax rate is 0% if it is qualified dividends or long-term gains.

    Thus, in your example, there is already $3100 in income. You can add $1600 more in long-term gains (or even short-term gains since the $900 short-term loss will offset $900 of that) and not owe any tax.

    Wiki David Grabiner

    Bmac

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    Re: Tax Reform – Revised Kiddie Tax

    Post by Bmac » Sun Dec 02, 2018 10:47 am

    Terrific. Thanks. That’s what I was calculating as well.
    #186026 Reply

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