Can I save capital gains taxes through UTMA or UGMA

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worthit
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Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

Dear BHs:

I came across https://resilientam.com/blog/a-simple-t ... or-parents. Looks like a legitimate way to save some money on taxes and at the same time put the extra dollars to good use.

Based on my limited understanding, it appears that I could potentially save capital gains taxes employing this strategy.

I have a 529 and in the 32% marginal tax bracket (some years 35%). So my capital gains taxes fluctuates between 15% and 20% with an additional 3.8%(NIT). But it is mostly in the 32% territory.

What I am not sure is whether I need to open up a trust in order to employ this strategy as my child has expenses of about $3000 - $4000 every year for things like music lessons, educational enrichment programs etc. I don't have a "Trust" as this article refers to the unearned income "trust" tax rates and don't even know what kind of a trust this would be.

Any thoughts?

Thank you in advance.
secondcor521
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by secondcor521 »

A couple of points:

1. Yes, shifting capital gains from parent to child is a generally known tax-saving technique.

2. The IRS and Congress are aware that people do this and have taken steps to prevent it. Google "kiddie tax" for more information.

3. The article is out of date with respect to taxation of children - it was written in 2019 before the SECURE Act passed. The SECURE Act changed the nature of children's tax rates. Here is a more recent article which discusses the evolution (and I believe is up to date on the status):

https://www.marketwatch.com/story/the-s ... 2020-01-29

You can open a UTMA account at any brokerage - it's basically a template account where the rules are established by state law rather than a trust document. Control transfers to the child at a state-determined age but generally between 18 and 21. Taxation of gains in the UTMA account would be at your child's rates but subject to the kiddie tax as mentioned above. You also may or may not be required to file a tax return for your child depending on how much and what type of income the child earned/received during the year.

The author of the article you quoted sort of glosses over the fact that if your kid exceeds the limits generally mentioned in the article (if you do continue to gift annually, eventually the capital gains on the kids' return can get into the thousands of dollars), then the kids' capital gains will be taxed at the parent's higher rate anyway (he alludes to it with mention of Form 8615 and in the part about "going overboard with capital gains").

Finally, I'm not convinced that the person is correctly arriving at the $4,700 figure. I thought - I could be wrong - that the $2,100 (now $2,200) exclusion for avoiding the kiddie tax and the $2,600 (now some different number due to SECURE Act) 0% tax bracket overlapped; the author seems to think that they stack. I'm not sure but I'd recommend you check with your tax professional or read up on it yourself before pursuing this.
privateer79
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by privateer79 »

secondcor521 wrote: Sun Jul 04, 2021 10:05 am
Finally, I'm not convinced that the person is correctly arriving at the $4,700 figure. I thought - I could be wrong - that the $2,100 (now $2,200) exclusion for avoiding the kiddie tax and the $2,600 (now some different number due to SECURE Act) 0% tax bracket overlapped; the author seems to think that they stack. I'm not sure but I'd recommend you check with your tax professional or read up on it yourself before pursuing this.
The brackets were switched back and forth a few times (the las time I believe the tax law changed was around 2019/2020)... you used to be able to do ~4,700 but now ~2200 is the limit. I think the article is stale on this point as well.

One of several related threads:
viewtopic.php?t=333793

Also if you have to file state taxes on this income it might be worth investigating any state credits your children might independantly qualify for (529 contributions, etc)
Last edited by privateer79 on Sun Jul 04, 2021 10:27 am, edited 1 time in total.
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Lee_WSP
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Lee_WSP »

What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.

Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.

IOW, this is a complex strategy at the margins for the super wealthy. Regular folks can safely ignore it as we're talking a difference of nearly nothing over the long term for most households.
privateer79
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by privateer79 »

Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
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Lee_WSP
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Lee_WSP »

privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
I know all that.

Doesn't change the high effort for low benefit analysis.

Edit
Actually it's even less tax efficient to pay for gift able and portentously potentially deductible expenses from the UTMA from a holistic point of view.

edit 2
It only saves $330 in federal taxes for the vast majority of parents at the cost of an extra tax return and trust management duties. $523 if you're in the 20% bracket with NIIT. It's a very personal decision since the parents have to gift the money, so the parent's are not really saving anything.
Last edited by Lee_WSP on Mon Jul 05, 2021 1:34 am, edited 1 time in total.
babystep
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by babystep »

UTMA is pretty easy to setup and can save on the capital gains tax on about $2200 of long-term capital gains.

The account ownership is supposed to transfer to the kid when 18/21 but it can also be used for kid's expenses including college.

A couple could contribute annual limit of 30k and might be able to keep generating $2200 of gains.
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

Thank you all. for your responses.
privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
Wow, I wasn't aware of this. Would I need to establish a Trust for this. How complicated is this process? Thank you.
babystep wrote: Sun Jul 04, 2021 11:35 pm UTMA is pretty easy to setup and can save on the capital gains tax on about $2200 of long-term capital gains.

The account ownership is supposed to transfer to the kid when 18/21 but it can also be used for kid's expenses including college.

A couple could contribute annual limit of 30k and might be able to keep generating $2200 of gains.
Thank you.

Is UTMA state specific? Any suggestions for a good, sound read about the mechanics of setting this up? I am just concerned about pit falls if any. But from the way you describe, it sounds pretty easy to set up and administer.
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Lee_WSP
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Lee_WSP »

A UTMA is a trust. You are holding the child’s money as a fiduciary *in trust* for their benefit.
hnd
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by hnd »

we sell in each of our childrens accounts to trigger 2000-2200 in LTG each year. we then turn around and rebuy. With turbotax we create a tax return for them and we are typically good to go. Its pretty easy peasy.

We do not wait and transfer from our accounts.
privateer79
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by privateer79 »

worthit wrote: Mon Jul 05, 2021 11:21 am

Wow, I wasn't aware of this. Would I need to establish a Trust for this. How complicated is this process? Thank you.
I don't believe you need to do anything beyond open the account and potentially file tax returns for the child ... its just like opening a brokerage account with some additional information (beneficiary (kid) and custodian(Parent)). as a parent you should be aware of what the funds can/can't be used for as they are legally the child's... the jist is it can only be for things "above and beyond" normal parental support (i.e. car, international flights, karate lessons, etc..) .

worthit wrote: Mon Jul 05, 2021 11:21 am Is UTMA state specific? Any suggestions for a good, sound read about the mechanics of setting this up? I am just concerned about pit falls if any. But from the way you describe, it sounds pretty easy to set up and administer.
if you use a stock broker they likely have an application form for setting one up.... the biggest hassle is filing an additional tax return each year, but since there's typically only one transaction, it's just entering a 1099 and a bunch of clicking "next" in turbotax.
babystep
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by babystep »

worthit wrote: Mon Jul 05, 2021 11:21 am Thank you all. for your responses.
privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
Wow, I wasn't aware of this. Would I need to establish a Trust for this. How complicated is this process? Thank you.
babystep wrote: Sun Jul 04, 2021 11:35 pm UTMA is pretty easy to setup and can save on the capital gains tax on about $2200 of long-term capital gains.

The account ownership is supposed to transfer to the kid when 18/21 but it can also be used for kid's expenses including college.

A couple could contribute annual limit of 30k and might be able to keep generating $2200 of gains.
Thank you.

Is UTMA state specific? Any suggestions for a good, sound read about the mechanics of setting this up? I am just concerned about pit falls if any. But from the way you describe, it sounds pretty easy to set up and administer.
The age of majority is defined by the state. https://finaid.org/savings/ageofmajority/

You can setup the account at typical brokerages like Fidelity, Schwab, Merril, etc by filling their standard form, I don't think there is much more to it. It just looks like another brokerage account, just that you don't do anything and let the ETF/mutual fund keep generating the tax free dividends. I would suggest to contribute 30k first and let it digest for 1 year so that you are comfortable and then take additional steps to optimize further.

You can search the UTMA in the search box to find threads for more info, also about when the tax can be filled under the parents return.

This article also has pretty good info. https://www.investopedia.com/terms/u/utma.asp
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

Thank you all for responding. This is very helpful.

I am going to look into this as it appears to be very straight forward.
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
OP here again. I have decided to open a UTMA based on the helpful responses but have some follow-up questions.

With regards to the bolded above, can you please elaborate if you dont mind? Does all the spending comes from the $2200 you end up saving? I am assuming you have a larger UTMA (6 figures or more probably? as the expenses you have listed seem to require a lot more than $2000. The reason I ask is because, I already have a 529 (>$100K) and I am unsure whether it is a good idea to give any access to funds before they are mature enough to handle it. I realize it is a personal choice and depends on the kid. I am trying to get to a reasonable number here.
hnd wrote: Mon Jul 05, 2021 11:51 am we sell in each of our childrens accounts to trigger 2000-2200 in LTG each year. we then turn around and rebuy. With turbotax we create a tax return for them and we are typically good to go. Its pretty easy peasy.

We do not wait and transfer from our accounts.
I like this approach as it keeps things simple. But how did you figure out the initial amount to fund the UTMA? In other words, I am struggling to come up with a reasonable number for the reason stated above. I certainly don't want a large (like 6 figures) UTMA account. I rather help my child in an adhoc fashion than handing over a large account to manage. Another poster mentioned $30k to start with. Not sure I would even go so high.

So here is my current thinking:

1. Open an UTMA account.

2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.

4. Use the gains to pay for educational expenses.

5. Inform my CPA to file the appropriate form during the yearly tax filing.

Does my plan look good?

Appreciate any suggestions/corrections you may have.

Thanks in advance.
secondcor521
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by secondcor521 »

If the stock pays a dividend and you want to avoid the kiddie tax (either paying it or having the hassle of figuring it out or both), then you'd need to reduce the LTCG realized in step 3. The kiddie tax includes all unearned income in the $2200 figure, which includes both LTCG and dividends (and interest for that matter).
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

secondcor521 wrote: Sat Jul 10, 2021 12:28 pm If the stock pays a dividend and you want to avoid the kiddie tax (either paying it or having the hassle of figuring it out or both), then you'd need to reduce the LTCG realized in step 3. The kiddie tax includes all unearned income in the $2200 figure, which includes both LTCG and dividends (and interest for that matter).
Thanks. I guess the kiddie tax matters only if the total is more than $1100, right?
secondcor521
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by secondcor521 »

worthit wrote: Wed Jul 14, 2021 2:24 pm
secondcor521 wrote: Sat Jul 10, 2021 12:28 pm If the stock pays a dividend and you want to avoid the kiddie tax (either paying it or having the hassle of figuring it out or both), then you'd need to reduce the LTCG realized in step 3. The kiddie tax includes all unearned income in the $2200 figure, which includes both LTCG and dividends (and interest for that matter).
Thanks. I guess the kiddie tax matters only if the total is more than $1100, right?
$2200. Cite: https://www.irs.gov/taxtopics/tc553
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

secondcor521 wrote: Wed Jul 14, 2021 3:08 pm
worthit wrote: Wed Jul 14, 2021 2:24 pm
secondcor521 wrote: Sat Jul 10, 2021 12:28 pm If the stock pays a dividend and you want to avoid the kiddie tax (either paying it or having the hassle of figuring it out or both), then you'd need to reduce the LTCG realized in step 3. The kiddie tax includes all unearned income in the $2200 figure, which includes both LTCG and dividends (and interest for that matter).
Thanks. I guess the kiddie tax matters only if the total is more than $1100, right?
$2200. Cite: https://www.irs.gov/taxtopics/tc553
Thank you secondcor521.
calwatch
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by calwatch »

worthit wrote: Sat Jul 10, 2021 9:54 am I like this approach as it keeps things simple. But how did you figure out the initial amount to fund the UTMA? In other words, I am struggling to come up with a reasonable number for the reason stated above. I certainly don't want a large (like 6 figures) UTMA account. I rather help my child in an adhoc fashion than handing over a large account to manage. Another poster mentioned $30k to start with. Not sure I would even go so high.

So here is my current thinking:

1. Open an UTMA account.

2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.

4. Use the gains to pay for educational expenses.

5. Inform my CPA to file the appropriate form during the yearly tax filing.

Does my plan look good?

Appreciate any suggestions/corrections you may have.

Thanks in advance.
This seems reasonable, although hopefully the CPA won't charge you extra to file a return that would wipe out the cost savings. It makes more sense for DIY'ers as the return for the child can be handled relatively easily. If that stock has dividends, remember the LTCG you can realize is $2200 minus the dividends and interest. It might be something to do partially, or wait until the end of the year, to know how much your dividends are. The other thing you could do is time your tax gain harvesting to a period when the market is low so that more shares can be harvested. The wiki has your standard guidelines for tax gain harvesting.
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

calwatch wrote: Thu Jul 15, 2021 1:19 pm
worthit wrote: Sat Jul 10, 2021 9:54 am I like this approach as it keeps things simple. But how did you figure out the initial amount to fund the UTMA? In other words, I am struggling to come up with a reasonable number for the reason stated above. I certainly don't want a large (like 6 figures) UTMA account. I rather help my child in an adhoc fashion than handing over a large account to manage. Another poster mentioned $30k to start with. Not sure I would even go so high.

So here is my current thinking:

1. Open an UTMA account.

2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.

4. Use the gains to pay for educational expenses.

5. Inform my CPA to file the appropriate form during the yearly tax filing.

Does my plan look good?

Appreciate any suggestions/corrections you may have.

Thanks in advance.
This seems reasonable, although hopefully the CPA won't charge you extra to file a return that would wipe out the cost savings. It makes more sense for DIY'ers as the return for the child can be handled relatively easily. If that stock has dividends, remember the LTCG you can realize is $2200 minus the dividends and interest. It might be something to do partially, or wait until the end of the year, to know how much your dividends are. The other thing you could do is time your tax gain harvesting to a period when the market is low so that more shares can be harvested. The wiki has your standard guidelines for tax gain harvesting.
Thanks, calwatch.
privateer79
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by privateer79 »

worthit wrote: Sat Jul 10, 2021 9:54 am
privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
OP here again. I have decided to open a UTMA based on the helpful responses but have some follow-up questions.

With regards to the bolded above, can you please elaborate if you dont mind? Does all the spending comes from the $2200 you end up saving? I am assuming you have a larger UTMA (6 figures or more probably? as the expenses you have listed seem to require a lot more than $2000. The reason I ask is because, I already have a 529 (>$100K) and I am unsure whether it is a good idea to give any access to funds before they are mature enough to handle it. I realize it is a personal choice and depends on the kid. I am trying to get to a reasonable number here.
(sorry for the late response, was out on vacation)
Usually what I do: I have a large taxable account with a bunch of individual holdings... each year I look through the holdings to find the one that has the highest % of unrealized capital gains (i.e. think gamestock at its peak)... I then gift enough of this security to my kids UTMA for them to take 2200 in gains, while trying to give the smallest amount of total assets. so lets say I have stock 'X' and it doubled since I bought it. I gift 4,400$ of 'X' (2200 of basis, and 2200 of gains) and then sell it in the UTMA to be used for these enrichment expenses. In practice I usually let the stocks sit there a while waiting for the expenses to come and so I frequently end up with some extra dividend payment, or a few extra shares due to the stock going up (or alternatively the stock goes down and I sell it all and miss the ~2200 in gains by a few bucks).

This won't cover all of those expenses though.

In practice there usually isn't a lot sitting in the UTMA, and so I don't have to worry about them becoming irresponsible 18 years olds. (well still a parent after all, so you never stop worrying.... but I don't have to worry about them becoming wealthy irresponsible 18 year olds ;) )
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

privateer79 wrote: Sun Jul 25, 2021 11:18 am
worthit wrote: Sat Jul 10, 2021 9:54 am
privateer79 wrote: Sun Jul 04, 2021 4:29 pm
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm What privateer said. It's a lot of work if you don't actually intend to gift your future 18/21 yr old child that money with absolutely no strings attached. I mean, you can condition future gifts on the child adhering to your wishes, but the money in the UTMA is theirs to do with as they wish once they reach adulthood.
As the administrator of the UTMA the parent can direct the funds in the best interest of the child beyond the basics of parental support (i.e. pay for private school, airplane tickets, karate lessons, etc).... (I typically drain my kids account each year to make room for next year... after all, at a certain asset level, dividends alone in that account eat up the entirety of the 0% tax bracket.)
Lee_WSP wrote: Sun Jul 04, 2021 12:25 pm Also, what's the point? If you die, your low basis assets get a much more efficient step up in basis. Giving away money so you don't pay taxes on it...might as well give it to charity or something. You could even wait and gift your child extremely low basis assets once they're an adult and you're are you don't need the money.
estate tax laws may change ( if you're a parent in your 40's ... you might be trying to predict estate law 50 years in the future)... You might also have gains in securities you don't want to hold for that long (Oil companies? gamestop? etc..) or might be at risk of being bought out from under you in the interim through corporate buy out/merger, etc...
OP here again. I have decided to open a UTMA based on the helpful responses but have some follow-up questions.

With regards to the bolded above, can you please elaborate if you dont mind? Does all the spending comes from the $2200 you end up saving? I am assuming you have a larger UTMA (6 figures or more probably? as the expenses you have listed seem to require a lot more than $2000. The reason I ask is because, I already have a 529 (>$100K) and I am unsure whether it is a good idea to give any access to funds before they are mature enough to handle it. I realize it is a personal choice and depends on the kid. I am trying to get to a reasonable number here.
(sorry for the late response, was out on vacation)
Usually what I do: I have a large taxable account with a bunch of individual holdings... each year I look through the holdings to find the one that has the highest % of unrealized capital gains (i.e. think gamestock at its peak)... I then gift enough of this security to my kids UTMA for them to take 2200 in gains, while trying to give the smallest amount of total assets. so lets say I have stock 'X' and it doubled since I bought it. I gift 4,400$ of 'X' (2200 of basis, and 2200 of gains) and then sell it in the UTMA to be used for these enrichment expenses. In practice I usually let the stocks sit there a while waiting for the expenses to come and so I frequently end up with some extra dividend payment, or a few extra shares due to the stock going up (or alternatively the stock goes down and I sell it all and miss the ~2200 in gains by a few bucks).

This won't cover all of those expenses though.

In practice there usually isn't a lot sitting in the UTMA, and so I don't have to worry about them becoming irresponsible 18 years olds. (well still a parent after all, so you never stop worrying.... but I don't have to worry about them becoming wealthy irresponsible 18 year olds ;) )
No problem, privateer 79.

Thanks for your detailed response. This is helpful.

I agree, as a parent I am worried as well about the consequences of leaving a large pot of gold to a 18 year old. You never know what that would do an impressionable mind.

Thank you.
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Free to Choose
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Free to Choose »

If your child uses the UTMA to provide more than 50% of support, he can do his own tax return and take the standard deduction. Add the benefit of the AOTC and he can have ~$20k in capital gains and pay no taxes. Some suggestions before jumping in:
- Ask your CPA
- Research articles and papers
- Run some examples through Turbo Tax
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

Thanks Free to Choose.

I rather keep it simple to the tune of $2200/year as I don't want to complicate it any further. I also have a funded 529. Frankly, I am only doing it to take advantage of not paying the capital gains tax while at the same time using to pay for my kids educational expenses.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Free to Choose »

worthit wrote: Tue Jul 27, 2021 7:42 am Thanks Free to Choose.

I rather keep it simple to the tune of $2200/year as I don't want to complicate it any further. I also have a funded 529. Frankly, I am only doing it to take advantage of not paying the capital gains tax while at the same time using to pay for my kids educational expenses.
My idea for your consideration relates to when you sell the investments to pay the college expenses. I did this for my children's college. It does take effort that I believe was worth it for my situation.

For accumulation, I recommend having all UMTA funds very tax efficient stock funds (i.e. VTSAX) that pay little capital gains and near zero short term gains. If you are under the $2200/year kiddie tax threshold, tax gain harvest. Income producing investments (bond funds) can be in a 529.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SnowBog »

worthit wrote: Tue Jul 27, 2021 7:42 am Thanks Free to Choose.

I rather keep it simple to the tune of $2200/year as I don't want to complicate it any further. I also have a funded 529. Frankly, I am only doing it to take advantage of not paying the capital gains tax while at the same time using to pay for my kids educational expenses.
Keep in mind, the $2200/year represents "gains", not how much you gift into the account. So if you want to "max" it out, you'll be adding more... (And if I recall, only $1100 is for interest/short term gains, the other $1100 is assumed to be long term gains.)

Personally, I'm using this to help fund future "college" expenses. I started saving late for college, but when I did a maxed out low state dedication 529 contribution + maxing out "kiddie tax" with appreciated shares seemed to be a cost effective approach with more flexibility (UTMA not restricted to "education" expenses).

One item to note, I thought I saw you mention a 6 figure UTMA... :shock: I'd be careful in that territory... First, the interest/dividends on that large of an amount likely exceeds the "kiddie tax" threshold. (We have low 5 figure, and it's a good chuck...). Second, you can't "reclaim" the money, and any money not spent on the child will eventually be controlled by the child. (There are horror stories of that...)

My "plan" is our combined UTMA + 529 will fund what we want to pay for college, so if child goes to college should be $0 before "they" get control of the money. If child doesn't go to college (or gets scholarships, etc.), we'll spend down the UTMA on things to help "set them up" for their trade/life. While not our intent to use the money for this, mentally our "upper limit" in the UTMA is whatever we could go spend on an afternoon such as buying a new car for child just to use up the funds if we had to...

One other side note, we ended up creating a "Custodial 529" as well. This can only be funded from a UTMA (so it's effectively funded by child from their UTMA). My projection is we'll have "enough" in the UTMA by when it's needed without needing to make more contributions. But to continue "using" the "kiddie tax" I'll do "tax gain harvesting" from the account. I then move the TGH proceeds and any "dividends" from the UTMA into the Custodial 529. From a "spend down" prioritizion, we'll empty the Custodial 529 first, then UTMA, then our 529 (and change beneficiary on this later one if needed).
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by sidartvader »

worthit wrote: Sat Jul 10, 2021 9:54 am
So here is my current thinking:

1. Open an UTMA account.

2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.

4. Use the gains to pay for educational expenses.

5. Inform my CPA to file the appropriate form during the yearly tax filing.

Does my plan look good?

Appreciate any suggestions/corrections you may have.

Thanks in advance.
Thank you for summarizing the approach, Worthit. I am trying to follow this procedure for my account at Vanguard. I opened a UTMA account, but the second step seems to be unclear to me. I am trying to fund it with some appreciated Wellington Admiral (VWENX) shares. Vanguard takes me through some steps detailing "where is the money coming up" and "where is the money going", which gives me the feeling that I might be actually selling VWENX shares and transferring the proceeds to the UTMA, as opposed to my intention of transferring the shares over from my brokerage to my kid's UTMA. Am I missing a step here?
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SnowBog »

sidartvader wrote: Sun Aug 01, 2021 1:36 pm
worthit wrote: Sat Jul 10, 2021 9:54 am
So here is my current thinking:

1. Open an UTMA account.

2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.

4. Use the gains to pay for educational expenses.

5. Inform my CPA to file the appropriate form during the yearly tax filing.

Does my plan look good?

Appreciate any suggestions/corrections you may have.

Thanks in advance.
Thank you for summarizing the approach, Worthit. I am trying to follow this procedure for my account at Vanguard. I opened a UTMA account, but the second step seems to be unclear to me. I am trying to fund it with some appreciated Wellington Admiral (VWENX) shares. Vanguard takes me through some steps detailing "where is the money coming up" and "where is the money going", which gives me the feeling that I might be actually selling VWENX shares and transferring the proceeds to the UTMA, as opposed to my intention of transferring the shares over from my brokerage to my kid's UTMA. Am I missing a step here?
You need to transfer the shares.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SnowBog »

worthit wrote: Sat Jul 10, 2021 9:54 am ...
2. Fund it with an already appreciated stock worth $10,000 that I have held for more than a year.

3. Sell stock (probably after a month?) to trigger the $2200 in LLTCG.
Just for clarification... When you gift appreciated shares, they include your cost basis.

So in your example, the $10,000 of already appreciated stock may well already have more than the $2200 LTCG allowed before hitting the "kiddie tax". Waiting another month is only going to make the already existing gains get bigger (unless you can predict a crash).

Additionally, assuming the funds have dividends and the child might have interest generating "savings" accounts, those also apply to the threshold.

So I look at things in reverse...
  • How much "interest & dividends" will the accounts generate this year.
  • Subtract that from $2200.
  • Which appreciated shares have "gains" that get me close to the remaining balance (leaving room for any dividends on the new shares). Assuming you have many lots over many years, you can likely choose between newer lots which are probably "bigger" with less gains or older lots which are probably "smaller" as more of them are gains. (The gains are the same, but the size of the gift itself may vary.)
  • Transfer the shares that meet your needs
  • Tax Gain Harvest (aka sell to lock in the gains within the 0% threshold of the kiddie tax), and reinvest as appropriate.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by sidartvader »

SnowBog wrote: Sun Aug 01, 2021 2:16 pm
You need to transfer the shares.
Thank you, SnowBog. This helps.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

Free to Choose wrote: Tue Jul 27, 2021 9:11 am
worthit wrote: Tue Jul 27, 2021 7:42 am Thanks Free to Choose.

I rather keep it simple to the tune of $2200/year as I don't want to complicate it any further. I also have a funded 529. Frankly, I am only doing it to take advantage of not paying the capital gains tax while at the same time using to pay for my kids educational expenses.
My idea for your consideration relates to when you sell the investments to pay the college expenses. I did this for my children's college. It does take effort that I believe was worth it for my situation.

For accumulation, I recommend having all UMTA funds very tax efficient stock funds (i.e. VTSAX) that pay little capital gains and near zero short term gains. If you are under the $2200/year kiddie tax threshold, tax gain harvest. Income producing investments (bond funds) can be in a 529.
Thanks Free to Choose.

I plan to transfer VTI (etf).
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worthit
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by worthit »

SnowBog wrote: Tue Jul 27, 2021 9:43 am
worthit wrote: Tue Jul 27, 2021 7:42 am Thanks Free to Choose.

I rather keep it simple to the tune of $2200/year as I don't want to complicate it any further. I also have a funded 529. Frankly, I am only doing it to take advantage of not paying the capital gains tax while at the same time using to pay for my kids educational expenses.
Keep in mind, the $2200/year represents "gains", not how much you gift into the account. So if you want to "max" it out, you'll be adding more... (And if I recall, only $1100 is for interest/short term gains, the other $1100 is assumed to be long term gains.)

Personally, I'm using this to help fund future "college" expenses. I started saving late for college, but when I did a maxed out low state dedication 529 contribution + maxing out "kiddie tax" with appreciated shares seemed to be a cost effective approach with more flexibility (UTMA not restricted to "education" expenses).

One item to note, I thought I saw you mention a 6 figure UTMA... :shock: I'd be careful in that territory... First, the interest/dividends on that large of an amount likely exceeds the "kiddie tax" threshold. (We have low 5 figure, and it's a good chuck...). Second, you can't "reclaim" the money, and any money not spent on the child will eventually be controlled by the child. (There are horror stories of that...)

My "plan" is our combined UTMA + 529 will fund what we want to pay for college, so if child goes to college should be $0 before "they" get control of the money. If child doesn't go to college (or gets scholarships, etc.), we'll spend down the UTMA on things to help "set them up" for their trade/life. While not our intent to use the money for this, mentally our "upper limit" in the UTMA is whatever we could go spend on an afternoon such as buying a new car for child just to use up the funds if we had to...

One other side note, we ended up creating a "Custodial 529" as well. This can only be funded from a UTMA (so it's effectively funded by child from their UTMA). My projection is we'll have "enough" in the UTMA by when it's needed without needing to make more contributions. But to continue "using" the "kiddie tax" I'll do "tax gain harvesting" from the account. I then move the TGH proceeds and any "dividends" from the UTMA into the Custodial 529. From a "spend down" prioritizion, we'll empty the Custodial 529 first, then UTMA, then our 529 (and change beneficiary on this later one if needed).
Thanks Snow Bog.

Oh no, I don't plan to transfer a 6 figure. Again, leaving a 6 figure to a 18 year (or maybe 21 in my state) old isn't a wise decision in my view. I am just going to transfer only the minimum to get the $2200 tax benefit. So it will in the 5 figure ball park.

Now, I wasn't aware that UTMA is not restricted to just educational expenses. Can you provide some examples of non-educational expenses please? Also, I am guessing we would need to retain all documentation regarding these expenditures?
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by Katietsu »

worthit wrote: Mon Aug 02, 2021 8:37 am Now, I wasn't aware that UTMA is not restricted to just educational expenses. Can you provide some examples of non-educational expenses please? Also, I am guessing we would need to retain all documentation regarding these expenditures?
You can spend it on anything as long as it is for the direct benefit of the child. So you could rent a bouncy house for a 6 year old or buy a car for a 16 year old.
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SnowBog »

Katietsu wrote: Mon Aug 02, 2021 9:03 am
worthit wrote: Mon Aug 02, 2021 8:37 am Now, I wasn't aware that UTMA is not restricted to just educational expenses. Can you provide some examples of non-educational expenses please? Also, I am guessing we would need to retain all documentation regarding these expenditures?
You can spend it on anything as long as it is for the direct benefit of the child. So you could rent a bouncy house for a 6 year old or buy a car for a 16 year old.
Slight clarification... I don't think expenses that are "expected" as a parent qualify... For example, AFAIK you can not use it to pay for "normal" child expenses such as food/clothing/housing while they aren't in college (as parents are generally expected to cover those expenses), presumably medical and anything else that if you didn't pay for you might be found "negligent" in providing care.

But anything outside of your "parental responsibilities", provided its for the direct benefit of the child, is fair game. I've heard of examples such as extra circular activities (think sports, band trip or class trip), family vacations (I assume only after they are out of high school...), vehicles, tools for a trade/hobby, etc.

Personally, our child's UTMA is "earmarked" for education expenses. But we have a plan (such as buying a car for them) to spend it down if not needed for education (and we decide we aren't comfortable with them having direct control at their maturity - TBD.)
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SuperDave »

Snow,

I believe your slight clarification is legally incorrect/misleading. The UTMA does allow and specifically says that all expenditures that benefit the minor are allowed regardless of any duty of the custodian to support the minor. Doing so may cause minor tax implications. That said it does seem simpler not to do this.

Here is the specific language in my state, I believe this the standard language in the Act, see the link:

MGL Part II, Title 2, Chapter 201A , Section 14. (a) A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (i) the duty or ability of the custodian personally or of any other person to support the minor, or (ii) any other income or property of the minor which may be applicable or available for that purpose.

Here is further information:
https://fairmark.com/kids-and-college/u ... r-support/
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Re: Can I save capital gains taxes through UTMA or UGMA

Post by SnowBog »

SuperDave wrote: Wed Sep 08, 2021 1:53 pm Snow,

I believe your slight clarification is legally incorrect/misleading. The UTMA does allow and specifically says that all expenditures that benefit the minor are allowed regardless of any duty of the custodian to support the minor. Doing so may cause minor tax implications. That said it does seem simpler not to do this.

Here is the specific language in my state, I believe this the standard language in the Act, see the link:

MGL Part II, Title 2, Chapter 201A , Section 14. (a) A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (i) the duty or ability of the custodian personally or of any other person to support the minor, or (ii) any other income or property of the minor which may be applicable or available for that purpose.

Here is further information:
https://fairmark.com/kids-and-college/u ... r-support/
My response was in context to OP's thread "those trying to save capital gains taxes". As your article confirmed, if this is the goal, one should not use the UTMA to fund anything that would be considered a parental/custodial obligation. As doing so would revert the income recognized back to the parent/custodian - and thus not meet the original goal. So I think my clarification stands.

But I always wondered what happened if I paid for "normal" things expected of a parent... I assumed it would disqualify the favorable tax treatment... And you've confirmed that's exactly what should happen! One less random question floating around in my head. Thanks! :beer
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