Ugh…Kiddie Tax! Any ideas to avoid this?

[Anonymous]

My 17 yo son invested some of the money he earned working various teenage jobs (lifeguard, ice cream shop) and invested it into a couple of stocks within his UTMA brokerage account. One of the stocks shot up and was bought out with an all cash deal by another company. He now has about a $25K long term capital gain for 2023. I originally thought he would not owe any taxes on that LT capital gain because he is still well within the 0% LT capital gain tax bracket due to his income (The 0% LTCG bracket for single filers is $44625 or less of taxable income). He would also not owe tax on his job income because he is below the regular income tax thresholds as well after the standard deduction. However, due to the kiddie tax rules he is being hit with about a $6K tax on this long term capital gain unearned income based on my (I file MFJ with my spouse) marginal tax bracket. This doesn’t seem fair since it’s his money not mine. Anyone know any legal tricks to get around this kiddie tax?

[Anonymous]

No

[Anonymous]

Anonymous wrote:My 17 yo son invested some of the money he earned working various teenage jobs (lifeguard, ice cream shop) and invested it into a couple of stocks within his UTMA brokerage account. One of the stocks shot up and was bought out with an all cash deal by another company. He now has about a $25K long term capital gain for 2023. I originally thought he would not owe any taxes on that LT capital gain because he is still well within the 0% LT capital gain tax bracket due to his income (The 0% LTCG bracket for single filers is $44625 or less of taxable income). He would also not owe tax on his job income because he is below the regular income tax thresholds as well after the standard deduction. However, due to the kiddie tax rules he is being hit with about a $6K tax on this long term capital gain unearned income based on my (I file MFJ with my spouse) marginal tax bracket. This doesn’t seem fair since it’s his money not mine. Anyone know any legal tricks to get around this kiddie tax?

And yes he contributed as much as he could to a Roth IRA based on his earned income but the kiddie tax is based on his unearned income.

[Anonymous]

You screwed yourself by selling and taking the cash offer without researching the pitfalls first. Any way around this would have occurred before the sale, not after.

[Anonymous]

Anonymous wrote:You screwed yourself by selling and taking the cash offer without researching the pitfalls first. Any way around this would have occurred before the sale, not after.

I don’t think I’m following you. Please explain. He didn’t sell it by choice. The company he had stock in was bought out in an all cash deal by another company. Anyone who had stock in the bought out company had their shares sold for cash when the deal closed. There was no other option with the stock within the buyout deal. We thought about putting the stock in a charitable remainder trust before the buyout was complete but there were downsides to that as well.

[Anonymous]

I'm not aware of any way around this, at least not at this point in the following year.

What's wrong with him paying his capital gains tax? Regardless, soon he won't be a dependent so this likely won't happen again.

[Anonymous]

I thought the limit was 20% and that’s for over 550k joint filling? So It shouldn’t be more than 5k, correct? Are you sure you’re calculating it correctly?

[Anonymous]

He uses his capital gains to pay his taxes. Duh.

[Anonymous]

What is the effect on your taxes if you don’t declare him as a dependent?

[Anonymous]

Why not file a separate return for him? He can still be your dependent..

[Anonymous]

Anonymous wrote:What is the effect on your taxes if you don’t declare him as a dependent?

At 17 you get a $500 credit for him...but he can still be a dependent and file his own return

[Anonymous]

Anonymous wrote:I'm not aware of any way around this, at least not at this point in the following year.

What's wrong with him paying his capital gains tax? Regardless, soon he won't be a dependent so this likely won't happen again.

This. I mean, sorry you can't figure out how to shelter your 17 year-old's windfall from taxes but oh well? He's still up 19k for doing literally nothing, I think it will work out in the end.

[Anonymous]

It’s his money, not yours, but he doesn’t have to use his money to support himself - why shouldn’t he pay the taxes? The reason for the income exemption is that people who earn so little generally need it all to live.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm not aware of any way around this, at least not at this point in the following year.

What's wrong with him paying his capital gains tax? Regardless, soon he won't be a dependent so this likely won't happen again.

This. I mean, sorry you can't figure out how to shelter your 17 year-old's windfall from taxes but oh well? He's still up 19k for doing literally nothing, I think it will work out in the end.

Because he'd likely pay nothing if he weren't a dependent.

I really wanted to hire this wonderful summer nanny who was highly recommended and my kids adore her. She wanted to be paid under the table because her dad makes 400k+. I understood the issue because it would be throwing her into a much higher tax bracket than she deserves to be in and leaving her with a large tax bill. I couldn't hire her though.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I'm not aware of any way around this, at least not at this point in the following year.

What's wrong with him paying his capital gains tax? Regardless, soon he won't be a dependent so this likely won't happen again.

This. I mean, sorry you can't figure out how to shelter your 17 year-old's windfall from taxes but oh well? He's still up 19k for doing literally nothing, I think it will work out in the end.

Because he'd likely pay nothing if he weren't a dependent.

I really wanted to hire this wonderful summer nanny who was highly recommended and my kids adore her. She wanted to be paid under the table because her dad makes 400k+. I understood the issue because it would be throwing her into a much higher tax bracket than she deserves to be in and leaving her with a large tax bill. I couldn't hire her though.

The kiddie tax rule applies to unearned income not earned income. Your nanny apparently wanted to dodge paying taxes, her dad had nothing to do with it.