Who pays tax on gains in my child’s investment account?

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Q. My daughter’s Vanguard UTMA has about $22,000 in Admiral shares with a $14,000 long-term gain and $700 short term gain if sold today. What is the tax treatment federally and for the state? Does she have to claim it on her tax returns or is there a way for me to claim it if I have long- and short-term capital losses carried forward to offset them? She has no income and will be 21 in a few months.
— Mom

A. This can be a tricky question.

If you opened a UTMA account for your daughter, she is the account owner and as the owner, she would be taxed on the gains from any sales. You are only the custodian.

The sales of her Vanguard account cannot be reported on your income tax return because you are not the owner of the account, said Patricia Daquila, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

Your carry forward losses cannot be used on your daughter’s tax return for federal taxes, she said, and New Jersey does not allow carry forward losses.

Your daughter would need to file both a federal and New Jersey income tax return to report the sale, Daquila said.

“For federal taxes, if her total unearned income was more than $1,100, and if the total of her interest, dividends and other unearned income exceeded $2,200 and she is a full-time student at least 19 years of age and under the age of 24, she would need to use Form 8615,” Daquila said. “Form 8615 would calculate the tax based on your income and tax rate. This is otherwise known as the `kiddie tax’ which was meant to discourage parents from transferring investments to their children to save on taxes.”

New Jersey does not have a “kiddie tax” and your daughter’s income tax would be based on her income bracket.

If her gross income was less than $10,000, then she would not even need to file a tax return for New Jersey, she said. If her income is approximately $14,700, her tax would be low for New Jersey.

“If she waited until she was 21 and she is still your dependent and/or a full-time student, the federal taxation would remain the same and it would not tip the tax scale,” Daquila said. “When she is no longer your dependent or a full-time student, then her federal tax would be based on her income and not yours for tax purposes.”

One possible strategy could be to split the sales over several tax years to minimize the gain in one year, Daquila said, suggesting you should consult with a tax professional who can look at your overall situation.

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This story was originally published on April 7, 2021

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.

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