Tax Question / Adult Child (full-time student)

[aim-high]

I've got two children 19 and 17. My wife and I file jointly. Income and gains will put us in the top tax bracket and liable for Net Investment Income tax of 3.8%.

Both children have UTMA accounts with unrealized long-term gains of a little more than 100k that I'm ready to take (concentrated position.)

I realize both will need to file tax returns based on their gains. Also 19 has some earned income.

1. Does it matter or is it required that I convert my 19 year old's account from UTMA to an individual account before selling.

2. For taxes, would it be better for her (19) to claim herself as a dependent rather than me claim her? (Better means least net tax liability regardless of whether the beneficiary is her or my wife and I.)

3. Same question for my son even though he is 17. Can he file his own tax return and claim himself as a dependent if he is 17? (If so, should I change the account for him from UTMA to personal account?)

My thinking is that if I claim them as dependents, they will get hit with the ACA Net Investment Income and taxed at my rate. Where if they file their own taxes and claim themselves, they'll get more benefit from the deduction and avoid 3.8% NII tax.

One more thought... Given we're near year-end, the possibility exists for me to sell half their positions this year for TY-2013 and have in TY-2014. That may be better if I can help them drop a tax bracket.

 

[RE2Boys]

Interesting scenario that is difficult to assess without running through a good tax estimator for 2013. Not sure if this info will be helpful but

1. I worked for a CPA firm for several years preparing individual tax returns. We ALWAYS prepared children's income on a their own return, never include it on parents return as it increases the parents AGI which can effect eligibility for numerous tax credits and deductions. Doesn't matter if child can claim their own dependency, always do a separate return for each child.

2. Technically, you don't get to choose whether a person can claim themselves, the facts and circumstances dictate who can claim themselves or who else can claim them. Unless your children ACTUALLY provided more than half their own support, they can not legally claim themselves on their own tax return. Of course, a little planning, given sufficient personal resources of the child, could address this issue.

3. See: http://www.google.com/url?sa=t&rct=...=24xhL_fJ-GRno82OQq_shg&bvm=bv.55617003,d.cWc
for more info concerning Kiddie tax and ACA

 

[kaneohe]

Nothing to add to RE2B's response except to say part of it w/ different words.
see p. C2 here http://www.irs.gov/pub/irs-pdf/p4012.pdf

I assume your kids would answer NO to question 1) (married?)
and then go to step 7) and answer YES (your dependent?).
If so, they could still file their own return but could not claim the personal
exemption for themselves even if you didn't.

 

[aim-high]

Ok. Thanks.