Over at Bogleheads we came across the following discussion:
by ram » Sat Jul 19, 2014 11:26 am
When my daughter graduated from high school in 2010 I had promised her $250,000 for her education. If she needed more she would take a loan and if she needed less the balance would be hers. For undergrad she attended the flagship in state school (UW, Madison) on partial scholarship instead of Johns Hopkins. The cost of her undergrad degree was 60 K. For the next 4 years she will attend UW Medical school, Madison on a full tuition scholarship (subject to maintaining decent grades) and an estimated living costs of 70 K. Thus by 2018 her education costs would be 130K and I will owe her a balance of 120 K.
Her current assets are $2500 in a Roth IRA at Vanguard. She will essentially make no money over the next 4 years and about 45 K/ year for 3 to 6 years starting July 2018. She is 21 years old now and a dependent on us and will turn 24 during calender year 2016.
I understand that at present her income from investment upto 2000/yr will be taxed at her(lower) rate. (Kiddie tax). At age 24 is she considered independent of parents for tax purposes.
I have appreciated Mutual Funds and ETF's in excess of 120 K at the present time in taxable accounts. I am hoping to pay her with these. Some of these are in asset classes that I do not wish to hold long term but do not want to liquidate because of capital gain considerations. (We are in the 39% tax bracket). Some of these are at locations that I do not wish to hold long term ( Ex- 25 K at Dodge and Cox).
My plan is to- 1) transfer 20 K now. At about 10% annual return it will be < 2000 /year and therefore at none/ modest tax. Transfer 28,000 per year (14000 x 2) per year once she is 24 yrs old. Transfer the most appreciated, most undesirable classes and fund locations to her. This way I will get some spring cleaning done while fulfilling our promise. She will sell these and pay cap gain taxes at her lower rate. My aim would be to have this all done by the time she finishes her residency/ fellowship. (earliest finish will be June 2021).
Please comment if this seems reasonable. Do I understand it correctly that her income is not under the purview of the kiddie tax once she is 24. Is it for the tax year that she turns 24 or only once she actually is 24. Any suggestion to achieve the above aim in the most tax efficient manner.
Her 529 accounts are currently over funded but the balance can be used by her younger brother, so that is not a concern.
Last edited by ram on Sat Jul 19, 2014 11:38 am, edited 1 time in total.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
Will she be married by then? Will she still be your dependent? Otherwise, it is end of the year for Form 8615.
When Form 8615 must be filed. Form 8615 must be filed for a child if all of the following statements are true.
1. The child's unearned income was more than $2,000.
2. The child is required to file a return for 2013.
3. The child either:
a. Was under age 18 at the end of the year,
b. Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
c. Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support.4. At least one of the child's parents was alive at the end of 2013.
5. The child does not file a joint return for 2013.
The sooner she marries, the sooner she will be off your back (you hope). I guess she could marry, file separately, and still stick it to you.
Posts: 21230
Joined: 6 Sep 2007
______________________________________________
Basically, you are just gifting money to her. That's all there is to it.
If she holds a taxable asset that you have gifted to her, the taxable income from that asset is only the annual distributions which should probably way below 10%. So you might as well make the annual gifts of the max amount while staying below the need to file a gift-tax return. Watch out for other interfering gifts like giving an old car or something like that.
Also be sure to tell her that she should have no sentimental attachment to these gifts and that you expect her to sell them when it is advantageous to do so and use them the way she sees is best.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
Posts: 32341
Joined: 1 Mar 2007
______________________________________________
by ram » Sat Jul 19, 2014 12:04 pm
sscritic wrote:Will she be married by then ( 12-31-2014)? - No.
Will she still be your dependent?- Yes
Otherwise, it is end of the year for Form 8615.
When Form 8615 must be filed. Form 8615 must be filed for a child if ALL of the following statements are true.
1. The child's unearned income was more than $2,000. NO
2. The child is required to file a return for 2014.- NO
3. The child either: YES (fulfils c)
a. Was under age 18 at the end of the year,
b. Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
c. Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support.4. At least one of the child's parents was alive at the end of 2014. Yes ( I hope so)
5. The child does not file a joint return for 2014. NO
The sooner she marries, the sooner she will be off your back (you hope). I guess she could marry, file separately, and still stick it to you.
No plans of marrying for at least the next 4 yrs.
So it appears that not ALL the conditions are fulfilled and so the form 8615 is not needed. What does filling the form mean. Liable for taxes on the investment income of $1999.
If there are no tax advantages of transferring before age 24 I can always wait till then. Do I understand correctly that at 24 even if she is single and even if I am paying all her expenses she is not a "dependent" on me for tax purposes.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
Are you sure about your answers? Remember, the instructions I copied were for 2013. The year 2013 in what I copied, you changed to 2014. I am not sure why you changed the year to 2014. I thought your question was about 2016. Maybe you have to think again about what your question is.
Posts: 21230
Joined: 6 Sep 2007
If she has to file a return, she has to file a return. That is separate from what forms does she have to file with her return. If she meets the qualifications, you can declare her income on your tax return, using Form 8814.
Maybe you should start here:
Pub 929
Tax Rules for Children and Dependents
P.S. You really should have been using it all along. She has been a child and a dependent in the past, right?
P.P.S. Your 80 year old mother can be your dependent. Age has nothing to do with it (directly). Read the pub.
Posts: 21230
Joined: 6 Sep 2007
______________________________________________
Note: that $2000 figure people throw around? Its for kids with no jobs, no earnings. I don't know how much "essentially no money" is. If she makes $1000 one year, the $2000 isn't $2000.
Posts: 21230
Joined: 6 Sep 2007
______________________________________________
ram wrote:If there are no tax advantages of transferring before age 24 I can always wait till then.
There are advantages for her, but not for you. If she gets the money sooner, the gains belong to her. If you keep the money, then you get the gains, but you give the same amount, so really it costs you less.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
Posts: 32341
Joined: 1 Mar 2007
______________________________________________
by ram » Sat Jul 19, 2014 12:30 pm
Thanks. I changed it to 2014 as the 2013 tax time is over. I will read the tax rules as you suggest. I think I may have made a significant mistake about the age thing. If age has nothing to do with dependency then I may simply have to wait till 2018 when she starts earning 45K per year and will be covering > 50 % of her expenses. Even for calender year 2018 she will have earned 22,500 which will be >50 % of her expenses. For 2019 onwards she will be covering 100% of her expenses. Does that seem OK. Thanks again.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
The biggest challenge I see is your daughter will have an interesting Traditional vs. Roth decision to make during residency. At current tax brackets in 2013 (filing single/standard deduction) she is in the 15% tax bracket up to $46250 and capital gains are taxed at 0%. So most of the capital gains would push her over the limit and those gains would be taxed at 15%. She could contribute to Traditional IRA (and depending on the program potentially 401k/403b)and have more space. But as a resident it's typically wise to be going with the Roth since it's likely your lowest income years. But in her case the marginal difference between Traditional and Roth is 30% (income rate at 15% + capital gains at 15% instead of 0%).
None of this is to suggest you shouldn't go ahead with the plan but it's going to take good communication and planning. You're making her tax bills higher. Obviously it comes with a huge gift so she should be very grateful but I think it's good to think about these things and also whether you're giving her extra to cover her taxes.
Posts: 186
Joined: 1 Jun 2007
______________________________________________
by ram » Sat Jul 19, 2014 12:38 pm
livesoft wrote:
ram wrote:If there are no tax advantages of transferring before age 24 I can always wait till then.
There are advantages for her, but not for you. If she gets the money sooner, the gains belong to her. If you keep the money, then you get the gains, but you give the same amount, so really it costs you less.
Livesoft,
The deal was that I would pay the educational expenses as they accrue. If she had done undergrad at hopkins I would likely have paid it all by now. On the other hand if a balance is remaining I am liable to pay it on the last day of her education. I am perfectly fine with paying her the returns on it if I hold on to it longer. Lets say that the question is ' how the family pays the least' tax.
Last edited by ram on Sat Jul 19, 2014 12:51 pm, edited 1 time in total.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
by ram » Sat Jul 19, 2014 12:45 pm
adam1712 wrote:The biggest challenge I see is your daughter will have an interesting Traditional vs. Roth decision to make during residency. At current tax brackets in 2013 (filing single/standard deduction) she is in the 15% tax bracket up to $46250 and capital gains are taxed at 0%. So most of the capital gains would push her over the limit and those gains would be taxed at 15%. She could contribute to Traditional IRA (and depending on the program potentially 401k/403b)and have more space. But as a resident it's typically wise to be going with the Roth since it's likely your lowest income years. But in her case the marginal difference between Traditional and Roth is 30% (income rate at 15% + capital gains at 15% instead of 0%).
None of this is to suggest you shouldn't go ahead with the plan but it's going to take good communication and planning. You're making her tax bills higher. Obviously it comes with a huge gift so she should be very grateful but I think it's good to think about these things and also whether you're giving her extra to cover her taxes.
Adam, I had not though of that. but you make a good point. Will monitor those numbers for the actual years. Thanks.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
Why make such a simple issue more difficult? Just give her the money and subtract it from your 10million dollar estate exemption. If you expect more then 10 million in estate in the future you will have bigger issues of estate planning then worrying about tax on a simple 120k.
Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
Posts: 2910
Joined: 3 Jan 2011
______________________________________________
by ram » Sat Jul 19, 2014 12:52 pm
staythecourse wrote:Why make such a simple issue more difficult? Just give her the money and subtract it from your 10million dollar estate exemption. If you expect more then 10 million in estate in the future you will have bigger issues of estate planning then worrying about tax on a simple 120k.
Good luck.
Fair enough.
Ram
Posts: 458
Joined: 1 Jan 2008
Location: Midwest
______________________________________________
by ram » Sat Jul 19, 2014 1:05 pm
sscritic wrote:Note: that $2000 figure people throw around? Its for kids with no jobs, no earnings. I don't know how much "essentially no money" is. If she makes $1000 one year, the $2000 isn't $2000.
Lets say she makes $0 during the 4 yrs of med school. She was doing some babysitting and tutoring during undergrad summers, but summers wont be free time in med school.
She filed a tax return for 2013.
Ram
