UTMA and Turbotax - where to enter

[dfmooreqqq]

My son (11) and daughter (9) both have UTMA accounts with dividends (son: ~$2400, daughter: ~$2000) and interest (son: $54, daughter: ~$40). There are also capital gains in those accounts (of about ~$2500) which are more than offset by capital gains losses that I have. They have no other income. My understanding is that the first $1300 of UTMA earnings are tax free, the next $1300 is taxed at their rate and beyond that, it is taxed at our rate. My question is where do I do this on Turbotax? I imported the 1099-DIV and 1099-INT into Turbotax when I imported the same from my brokerage account from the same bank, but there is no place to indicate that these accounts are theirs. I also put the information in the "Less Common Income", and then "Child's Income". But now I feel like I'm double counting that income? Should I only include it in one place? Which one? Or is both the right way to do it.

[rjs]

You have to file a separate tax return for each child. You cannot include their income on your tax return. Their UTMA transactions and income go on their individual tax returns, not on your tax return. You go through the "Child's Income" section on each of their tax returns, not on your tax return.

You said that the children's UTMA accounts have capital gains "which are more than offset by capital gains losses that I have." Your capital losses cannot offset the children's capital gains. Their capital gains go on their tax returns. Your capital losses go on your tax return.

Their is an option to report a child's income on the parent's tax return. You cannot use that option because the children have capital gains. It's usually not a good idea to do that anyway. The only advantage of reporting the child's income on the parent's return is that it's less paperwork. It will not save any tax, and in many cases you could end up paying more tax overall than if you file separate returns for the children.

[dfmooreqqq]

https://www.irs.gov/taxtopics/tc553

This seems to suggest that I can file them on my tax return, including capital gains: "If your child's only income is interest and dividend income (including capital gain distributions) and totals less than $13,500, you may be able to elect to include that income on your return rather than file a return for your child. See Form 8814, Parents' Election To Report Child's Interest and Dividends. "

[rjs]

There's a difference between capital gains and capital gain distributions. Capital gain distributions are a type of dividends, typically from mutual funds. They are reported in box 2a of Form 1099-DIV. Capital gain distributions can be reported on the parent's tax return.

When an investment in a UTMA is sold, the resulting gain or loss is a capital gain or loss. The sale is reported on Form 1099-B. Capital gains and losses from investment sales cannot be reported on the parent's tax return.

But as I said earlier, the only advantage of reporting the children's income on your return is that it's a little less paperwork. But there are potentially significant disadvantages that can result in higher tax for both you and the children. Part of their income gets included in your Adjusted Gross Income (AGI). This could cause you to lose certain deductions or credits that are limited or phased out based on AGI. It could also increase your state tax. The children lose the ability to take certain deductions that they could take on their own returns, and they lose the 0% tax rate on part of their qualified dividends and capital gain distributions. So you are probably better off, and certainly no worse off, having the children file their own returns.

If the children have capital gains from the sale of investments in the UTMA you have no choice. Capital gains, as opposed to capital gain distributions, cannot be reported on the parent's tax return.

[dfmooreqqq]

So my confusion is still about putting it in to Turbotax. So, for example, when I start to do a tax return for my kids who are under 18, it tells me that "If your parents report your income on their return, you do not need to complete or file this return if you no income from working." (which is true, the income is not from working).  

[rjs]

I'm not sure what your question is. First of all, understand that when the screens in TurboTax say "you" they are talking to the taxpayer, even if the taxpayer is only 3 years old. When you start a child's tax return TurboTax says "IF your parents report your income on their return...." But in your case, if I understand correctly, you are not reporting the children's income on your tax return, so they do have to file their own tax returns. It makes no difference whether they have income from working. The corollary of what TurboTax says is: IF your parents do not report your income on their return then you (the child) must file your own tax return.

The parent may or may not have a choice about reporting the child's income. If the child has capital gains or losses from investment sales, there is no choice. All of the child's income must be reported on the child's own tax return.

If all of the conditions for reporting the child's income on the parent's tax return are met, then the parent does have a choice. If the parent chooses to report the child's income on the parent's return, the child does not have to file a separate tax return. If the parent chooses not to report the child's income on the parent's return, then the child is required to file a separate tax return. As I said before, my recommendation is to never report the child's income on the parent's tax return.

At the risk of causing more confusion, I want to point out an error on the TurboTax screen that contains the sentence you quoted. The first line of that screen says (again talking to the child) "Since you are under age 18, your parents may need to report some or all of your income on their tax return." That is absolutely not true. The parents never "need" to report the child's income on their tax return. They may or may not have the option to report the child's income, but they are never required to report the child's income on their tax return.

[Mike9241]

you can report the children's income on your return but only if the child's only income is from interest, dividends, and capital gain distributions. You are not required to use this method even if qualified.If securities were sold in their account, you can not use this method 

The advantages of filing on parents' return:

• No need to file a separate return for the child, which might save some TurboTax fees
• Parents' income is increased, which may allow a larger investment interest deduction
• The parents' AGI-based limit on charitable contributions is increased

For most parents, only the first one is relevant

The disadvantages:

• Lost deductions for the child, such as any early withdrawal on savings penalty
• Greater net investment income. This could subject parents to NIIT or increase the tax
• Potentially a greater tax on the child's income. The first $1,350 of the child's taxable income MAY BE taxed at 10%, unless it consists of qualified dividends and/or capital gain distributions