Custodial Account (Do I need to file a return for my children if they sell a stock/mutual fund in custodial)?

[boss89]

I had a previous post regarding if I was required to attach my childrens 1099 for their custodial to my return or if I would need to file their own seperate return and it sounded like as long as their unearned income was less than $1,100 and they didn't have earned income that I didn't need to do anything. 

I was doing some more reading and came across this article that stated the following about trading assets:

 However, if your child has capital gains income from trading assets, as opposed to coming from distributions from mutual funds and other investments, you'll need to file a separate return.

We have our childrens custodials invested in a mutual fund and I was thinking about selling the fund and going to cash for our kids so I don't have to deal with filing returns in the future. When I sell their fund that would be considered a trade or sale and if it wasn't held for a year it would be a short term capital gain I believe. If I hold for over a year that would be a long term capital gain. My question is if I sell that fund does that mean I have to file a return for my child regardless if the earning were less than $1,100 because its considered a trade of assets? They have no earned income and their unearned income is from interest, dividends and distributions from the mutal fund (long and short) but I haven't held the fund for a year yet. Thank you in advance.

[macuser_22 · Accepted solution]

2020 Filing requirements for dependents.

Single dependents— (Not age 65 or older or blind)

You must file a return if any of the following apply.
1. Your unearned income was more than $1,100.
2. Your earned income was more than $12,400.
3. Your gross income was more than the larger of—
a. $1,100, or
b. Your earned income (up to $12,050) plus $350.

Or Dependent had net earnings from self-employment of at least $400. 

However, if any tax was withheld, then Dependent might want to file anyway to get a refund of the tax withheld.

Also, a person that CAN be a dependent cannot claim him/her self and must check the box that says that another taxpayer can claim them (whether or not that taxpayer actually claims him/her).

Note: your state filing requirements might be different than the federal.

[boss89]

Have you seen anything about the part I was referencing about "trading assets" would then require me to file a return for my children or does that not matter as long as the unearned income was still less than $1,100? Thank you 

[rjs · Accepted solution]

You didn't say where you came across that statement about capital gains. I think you are taking it out of context. For determining whether or not a dependent has to file a tax return, capital gains are unearned income, the same as interest, dividends, and distributions from mutual funds. It doesn't matter whether the gain is short-term or long-term. You just add up all the unearned income of any kind. If the total is more than $1,100 the dependent has to file. If it's $1,100 or less, the child does not have to file, regardless of the type of unearned income.

The statement that you quoted is not talking about whether or not the child has to file. If a child is required to file, and the child's only income is interest and dividends, there is an option in many cases for the parents to include the child's interest and dividend income on the parents' tax return instead of filing a separate tax return for the child. What the statement that you saw is saying is that if the child has capital gains, you do not have the option to report the child's income on the parents' return. But that's only a consideration if the child is required to file. If the child is not required to file, it doesn't matter whether the child's income could be reported on the parents' return because the child's income is not going to be reported anywhere.

Aside from filing requirements, if you are determined to sell the mutual fund, but there is no particular need to sell it right now, you should seriously consider waiting until you have held it for more than a year. Long-term gain is taxed at lower rates than other income, and the tax rate for long-term gain in the lowest bracket is 0%. If the gain is long-term there's a good chance that the child will not have to pay any tax on the gain at all. Even if there is some tax on the gain, the tax will be significantly less than if it were short-term gain.

[rjs]

The distinction that the quoted statement is making is between capital gain from trading and capital gain distributions from a mutual fund. But again, that distinction only affects whether the child's income can be reported on the parents' tax return. The distinction between capital gain from trading and capital gain distributions from a mutual fund does not matter for determining whether the child is required to file. So no, trading assets would not require the child to file a tax return if the child's unearned income is $1,100 or less.

[boss89]

It sounds like I was over complicating it and got confused. My main question was just pertaining to if I needed to file if I sold the mutual fund in the custodial because I thought that if you made money from selling/trading the fund you automatically were required to file regardless of the $1,100. It sounds like that isn't the case unless I am over the $1,100.

On a side note  If I sell the fund now we will be nowhere near the $1,100 in unearned income so it shouldn't affect short term or long term taxes since I won't have to file a return if I have understood everything correctly. 

[boss89]

Am I correct that if the sale of the fund that is held for less than a year (short term capital gain) doesn't matter as long as the unearned income is still less than $1,100 since we won't be required to file a return? Thank you

[rjs]

Yes, that's correct as long as there is no earned income.

[boss89]

There would be no earned income. Thank you!