Kiddie tax/UTMA

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Topic Author
mschurner
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Joined: Sun Sep 23, 2018 11:33 pm

Kiddie tax/UTMA

Post by mschurner »

Hello,

I have been reading about UTMA and kiddie tax lately.

With UTMA, 1st $1100 gain is tax-free and another $1100 is taxed at the child's rate which is $0 for LTCG.

Let's assume I have shares of VTI with the cost basis of $1000 with gains of $2000.  Gift them to the kid and then sell it within a couple of days and realize the gain. $3000 sitting in the UTMA account now.  I got this part for the first year.  I can't do the exact same thing for the next year because the existing VTI will give dividends which will reduce the limit of how much I can gift and realize. In that case how to maximize the tax benefit every year going forward?

I suppose I can withdraw $3000 out of UTMA.  I should use that money for the benefit of kids. My understanding is that I can't use it for everyday expenses like food, clothing and shelter.  
Can I Contribute to the amount to the regular 529 account. Does it work? By doing this I can zero out the account every year as I contribute about $5000 to 529 plan every year anyway.
What about travel expenses if we fly abroad and buy gold coins for kids. Can I count them as well?
Can someone help me out with this?
Thank you. 
k8n
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Re: Kiddie tax/UTMA

Post by k8n »

I believe that taking your kids abroad would probably be ok with UTMA money, I'm not sure about buying gold.
I used to play the game of moving stock into UTMA accounts to save some capital gains, but it's such a hassle that I'm not doing that anymore. What's much easier is to just put a large amount of stocks in there so they generate < $2200K in dividends every year, get those dividends tax free, and then forget about the account.
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

k8n wrote: Fri Jul 23, 2021 7:17 pm I believe that taking your kids abroad would probably be ok with UTMA money, I'm not sure about buying gold.
I used to play the game of moving stock into UTMA accounts to save some capital gains, but it's such a hassle that I'm not doing that anymore. What's much easier is to just put a large amount of stocks in there so they generate < $2200K in dividends every year, get those dividends tax free, and then forget about the account.
Thank you for the response.
What about contributing to 529? That shouldn't pose any problem,  right?
To get $2200 dividend with passive index funds, it looks like I need to park 6 figure amount. Is that what you are recommending?  I don't want to gamble with individual stocks.
k8n
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Re: Kiddie tax/UTMA

Post by k8n »

I wouldn't say I'm recommending anything, it's really up to you :) When I say stock, I really mean a Total Stock Index Fund. You are right that you can park quite a bit of money in there, I think I have high 5 figures in the account. The 529 seems reasonable, but I don't know.
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

Got it :) I'm in early accumulation phase. I just cant park that much amount in UTMA.
I'll wait for other suggestions. Thank you.
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Wiggums
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Re: Kiddie tax/UTMA

Post by Wiggums »

Each child would be entitled to that tax break. (1st $1100 gain is tax-free and another $1100 is taxed at the child's rate)
"I started with nothing and I still have most of it left."
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

Wiggums wrote: Fri Jul 23, 2021 8:21 pm Each child would be entitled to that tax break. (1st $1100 gain is tax-free and another $1100 is taxed at the child's rate)
Yes. I'm aware. I just opened up UTMA account with Vanguard for each one of them.
May I know what you have been doing?
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gobel
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Re: Kiddie tax/UTMA

Post by gobel »

My understanding is that the 3k can only be moved to a UTMA 529 account. It can't be moved to the 529 you have already opened for them because you are the owner (at least that's what I've read here on BH).

You can rebuy the VTI and just keep track of the divs that are earned next year. You can even sell them again if they've gone up (if under 1100, even stcg is ok), then figure out how much room you have left and gift them more VTI with gains from your account.

Putting 6 figures in the UTMA means gifting them 6 figures which they would take possession of at 21yo (state dependent), unless you figure out a way to drain that legitimately before that (there was also at least one thread here about a parent that had to resort to that when their teen had issues).

ps. the gifting and realizing of gains are separate. Eg. you could gift 10k right now and just sell enough each year to max the tax benefit, after offsetting for divs.
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

gobel wrote: Fri Jul 23, 2021 8:34 pm
My understanding is that the 3k can only be moved to a UTMA 529 account.  It can't be moved to the 529 you have already opened for them because you are the owner (at least that's what I've read here on BH).
Is there any limit on how much I can move to UTMA 529? From what I can see, I could still get the tax benefits for IL  state tax with UTMA 529. I need to do a little more research though. I just can't change the beneficiary.
You can rebuy the VTI and just keep track of the divs that are earned next year.  You can even sell them again if they've gone up (if under 1100, even stcg is ok), then figure out how much room you have left and gift them more VTI with gains from your account.

Putting 6 figures in the UTMA means gifting them 6 figures which they would take possession of at 21yo (state dependent), unless you figure out a way to drain that legitimately before that (there was also at least one thread here about a parent that had to resort to that when their teen had issues).
I can't put 6 figures. I don't think I would even want that even if I can. So without a high figure in the account, I would get a measly dividend. In that case, I'm not sure whether it's worth doing this UTMA at all. What is the benefit for someone who can't park large figure then?
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CAsage
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Re: Kiddie tax/UTMA

Post by CAsage »

The downsides to doing this are: 1) hassle and 2) you really do legally have to give away the money. It's not yours any more, you can't legally withdraw it and spend it later on quasi-kid expenses. It's a gray area most people don't want to mess with. If you plan to fund college, a 529s account is IMO a better solution. If you are trying to shove money on your children to cut your estate... wait until they get real jobs and fund their Roth IRA.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
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gobel
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Re: Kiddie tax/UTMA

Post by gobel »

Some people use the UTMA exactly the way you were planning - to move some low basis stock and sell enough of it each year to stay in 0% LTCG. Then rebuy it and keep it in the UTMA and collect the divs. If you do this every year for 20 years, you'd save taxes on 50k+ and have 50-100k of stock with pretty high basis saved for the kid.

Is the problem that you don't want them taking control of so much money? If you feel your children are responsible, tell them this is part of their college fund (caveat: a large UTMA will have a big effect on financial aid, probably a UTMA 529 also because it's a student asset). otw other BHs have suggested ways to use the money earlier, eg. paying for summer camp etc, but I don't have any experience with that.
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NewMoneyMustBeSmart
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Re: Kiddie tax/UTMA

Post by NewMoneyMustBeSmart »

mschurner wrote: Fri Jul 23, 2021 8:27 pm
Wiggums wrote: Fri Jul 23, 2021 8:21 pm Each child would be entitled to that tax break. (1st $1100 gain is tax-free and another $1100 is taxed at the child's rate)
Yes. I'm aware. I just opened up UTMA account with Vanguard for each one of them.
May I know what you have been doing?
We created 529 accounts in our name. We have been putting money in annually for kids and niblings.

We gifted the kids some somewhat appreciated shares which have since highly appreciated. This is good because it used less gift exemption.

This gift went into a UTMA custodial account which we administer for the kids until they are of age.

We opened custodial 529 accounts in the name of the kids.

Each year, we take the stock in their UTMA account and sell a certain amount; and diversify some into cash. Then we contribute that cash to the Custodial 529 plan in their name (they are owners, we are custodian).

In this manner, each kid has 2 529 accounts, one in our name (for their benefit) and one in their name (For their benefit).

In theory we only diversify $2200 per year but with the appreciation, we felt it was better for them to diversify and pay out tax as they are years from being out of kiddie tax penalty zone.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

CAsage wrote: Sat Jul 24, 2021 10:46 am The downsides to doing this are: 1) hassle and 2) you really do legally have to give away the money. It's not yours any more, you can't legally withdraw it and spend it later on quasi-kid expenses. It's a gray area most people don't want to mess with. If you plan to fund college, a 529s account is IMO a better solution. If you are trying to shove money on your children to cut your estate... wait until they get real jobs and fund their Roth IRA.
Thank you for the response. I agree with you, it's a hassle. I think it's going to be personal depending upon the tax bracket and number of UTMA/kids.
For $2200 LTCG, it's going to save about $330 ( 15% ) in federal taxes plus state taxes. About $660 for two kids for myself. Probably its worth. I need to look at moving the money from UTMA to 529 UTMA.
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

gobel wrote: Sat Jul 24, 2021 11:01 am
Some people use the UTMA exactly the way you were planning - to move some low basis stock and sell enough of it each year to stay in 0% LTCG. Then rebuy it and keep it in the UTMA and collect the divs. If you do this every year for 20 years, you'd save taxes on 50k+ and have 50-100k of stock with pretty high basis saved for the kid.
Thank you for the response.
We need to park either large figure to get $2200 dividends every year or individual stocks which pay high dividends. This might pose problem for lot of investors.
Is the problem that you don't want them taking control of so much money? If you feel your children are responsible, tell them this is part of their college fund (caveat: a large UTMA will have a big effect on financial aid, probably a UTMA 529 also because it's a student asset). otw other BHs have suggested ways to use the money earlier, eg. paying for summer camp etc, but I don't have any experience with that.
From my understanding, UTMA is a student asset and UTMA 529 is considered a parental asset. That's why it's preferable to move from UTMA to UTMA 529 when the kid is closer to the college. Problem is to sell the funds and realize the gain for which students need to pay the tax. So it's preferable to move right away.
Topic Author
mschurner
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Re: Kiddie tax/UTMA

Post by mschurner »

NewMoneyMustBeSmart wrote: Sat Jul 24, 2021 10:07 pm
mschurner wrote: Fri Jul 23, 2021 8:27 pm
Wiggums wrote: Fri Jul 23, 2021 8:21 pm Each child would be entitled to that tax break. (1st $1100 gain is tax-free and another $1100 is taxed at the child's rate)
Yes. I'm aware. I just opened up UTMA account with Vanguard for each one of them.
May I know what you have been doing?
We created 529 accounts in our name. We have been putting money in annually for kids and niblings.

We gifted the kids some somewhat appreciated shares which have since highly appreciated. This is good because it used less gift exemption.

This gift went into a UTMA custodial account which we administer for the kids until they are of age.

We opened custodial 529 accounts in the name of the kids.

Each year, we take the stock in their UTMA account and sell a certain amount; and diversify some into cash. Then we contribute that cash to the Custodial 529 plan in their name (they are owners, we are custodian).

In this manner, each kid has 2 529 accounts, one in our name (for their benefit) and one in their name (For their benefit).

In theory we only diversify $2200 per year but with the appreciation, we felt it was better for them to diversify and pay out tax as they are years from being out of kiddie tax penalty zone.

Great. Thank you. This is what I'm planning to do.
Regarding state tax benefits, is contribution UTMA 529 eligible? If not it will negate the whole purpose of doing this.
Do I need to transfer assets from UTMA to UTMA 529 directly? Can I just withdraw the money from UTMA and contribute to UTMA 529 as a custodian?
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NewMoneyMustBeSmart
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Re: Kiddie tax/UTMA

Post by NewMoneyMustBeSmart »

mschurner wrote: Mon Jul 26, 2021 11:49 am
Great. Thank you. This is what I'm planning to do.
:)
mschurner wrote: Mon Jul 26, 2021 11:49 am Regarding state tax benefits, is contribution UTMA 529 eligible? If not it will negate the whole purpose of doing this.
some states are, some states aren't. Do a web search.
mschurner wrote: Mon Jul 26, 2021 11:49 am Do I need to transfer assets from UTMA to UTMA 529 directly? Can I just withdraw the money from UTMA and contribute to UTMA 529 as a custodian?
The UTMA529 I use allows me to ACH pull the money from a bank account or the brokerage. So in my case, as custodian, I move the kid's money from their utma brokerage to their utma529.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
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