Tax implications of gifting appreciated stock or crypto to a minor child vs UGMA/UTMA
I'm considering gifting appreciated stock to a minor child so he can sell it to pay for expenses he has.
My confusion stems from what his tax rate would be in this case vs UGMA/UTMA
Ideally he'd be able to sell more or less immediately and take the long-term capital gain of 0% because he makes far less than $45k a year, but the Kiddie Tax details confuse me.
If he sells enough that his tax rate attaches to the parents' tax rate (mine), is it based on my ordinary rate or capital gains tax rate? If the former, is the lowest possible tax rate 10%, or is a 0% rate possible if I owe no federal tax at all?
Finally, does this gain formally hit his income or mine? For purposes of things like the FAFSA it may be relevant.
Thanks!
Answers
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Hi orthros,
Depending on the amount you want to give your child, you may want to consider gifting him cash instead of stocks. If you gift him stocks, the gains from the sale would be included as part of his Adjusted Gross Income (AGI) and he would pay income tax on the gains (if his income is above $44,625). If you instead gift him cash of $18,000 or less, he does not need to report the income on his tax return, and you would generally not need to file a gift tax return or report it at all, either.
If you do gift him stocks, the gain will be considered his income, not yours. An exception would be if you choose to claim his unearned income at your higher tax rate on your tax return using Form 8814, but that typically will not be an option if the child earned income during the year.
The Kiddie Tax can be pretty complicated and depends a lot on the amount of the unearned income, as well as your child's and your income and tax during the year. You may want to try entering an approximation of your 2024 information into your FreeTaxUSA account to see what you can expect for your return. Then you can create a separate FreeTaxUSA account for the child. Enter the information for the potential stock sale by going to Income > Common Income > Investments and Savings. Enter information for the Kiddie Tax by going to Misc > Other Taxes > Unearned Income Tax for Children (Form 8615).
