Should I realize gains in my kid's UTMA account now?

[Ncc1701]

Hi all, just thinking of a way of saving money on taxes. So 10 years ago I bought the Magnificent 7 in my son's UTMA account and as you can imagine, he has some nice unrealized gains now. He is 20 years old and will inherit the account next year.

Since he's in college and has little to no income right now, wouldn't it make sense to sell those stocks, realize the gain and then immediately buy them back? Since he has no income and if I keep the gain below $80K, isn't it true that there will not be any capital gains tax to pay since he will be in the 0% cap gains tax bracket?

Thanks for your thoughts!

 

[Dash man]

Yes, go for it.
My three grandkids each have an account. I sell and buy back some of the stocks each year keeping under the level where children’s income doesn’t have to be reported.

 

[GrayHare]

I'll bet you credits to navy beans you can put a dent in their future tax liability by that approach.

 

[HarveyS]

Not sure if your son is getting any financial aid. If so, the sudden income may cause that to dry up. Double check the $80,000 figure. I think it is less for single filers.

 

[Ncc1701]

Not sure if your son is getting any financial aid. If so, the sudden income may cause that to dry up. Double check the $80,000 figure. I think it is less for single filers.

That's an excellent point, thanks for bringing to my attention

 

[jj]

Don't forget about the kiddie tax. If your son is your dependant he will be taxed at your rate if realized gains are more than about $2,600 (may be slightly higher for 2025TY)

 

[Dash man]

Don't forget about the kiddie tax. If your son is your dependant he will be taxed at your rate if realized gains are more than about $2,600 (may be slightly higher for 2025TY)

$2,600 for 2025

Topic no. 553, Tax on a child's investment and other unearned income (kiddie tax) | Internal Revenue Service

Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)

www.irs.gov

 

[Ncc1701]

Thanks for reminding me about the Kiddie Tax, forgot about that. I guess I'll wait till he is no longer a full time student

 

[Texas Proud]

Interesting... I just move DDs account to her... but from what I see it is best to wait until they are no longer a dependent and file their own tax return...

IOW, I doubt their first job will put them in a high tax bracket... so probably zero gain anyhow...

 

[copyright1997reloaded]

You are likely mostly too late. As noted by others, you need to be aware of the kiddie tax limit and now income (capital gains) which could impact his financial aid.

As an aside, this technique (selling appreciated securities in a child account) is known as "tax gain harvesting". I did it for a number of years for my child to take advantage of their 0% bracket. Sell some stock, buy it back immediately (there are no wash sale issues on gains).

However, not all is lost. When your child graduates (or even after doing the financial aid stuff for the last year), take advantage of them having limited income to book some gains. If they get a job mid-year, their income for that year will be less (than future years), especially if they are getting a good but not crazy good starting salary. Harvest those gains (i.e. get their cost basis higher). Even though my child is working full time, I was still able to do some of this this past tax year (2024), i.e. take advantage of the 0% LTCG bracket.

 

[Ncc1701]

You are likely mostly too late. As noted by others, you need to be aware of the kiddie tax limit and now income (capital gains) which could impact his financial aid.

As an aside, this technique (selling appreciated securities in a child account) is known as "tax gain harvesting". I did it for a number of years for my child to take advantage of their 0% bracket. Sell some stock, buy it back immediately (there are no wash sale issues on gains).

However, not all is lost. When your child graduates (or even after doing the financial aid stuff for the last year), take advantage of them having limited income to book some gains. If they get a job mid-year, their income for that year will be less (than future years), especially if they are getting a good but not crazy good starting salary. Harvest those gains (i.e. get their cost basis higher). Even though my child is working full time, I was still able to do some of this this past tax year (2024), i.e. take advantage of the 0% LTCG bracket.

Aren't I too early instead of late? You are correct. Best thing to do is wait until he is no longer a full time student so that avoids the kiddie tax and then start selling when his income is low. Thanks!

 

[copyright1997reloaded]

Aren't I too early instead of late? You are correct. Best thing to do is wait until he is no longer a full time student so that avoids the kiddie tax and then start selling when his income is low. Thanks!

It would have been better the years before college to take gains and reset cost basis higher. But as noted, you will likely still have opportunity after he graduates (but before he is pulling in millions ).