How to handle Kiddie Tax 2024 for custodial accounts with unearned income

I can help clear this up for you! The Kiddie Tax can be confusing, but you're asking good questions. For your first question, if your daughter only has unearned income (dividends) less than $1300, you're right - you don't need to file any tax forms. The standard deduction for a dependent with only unearned income is $1250 for 2024, so any amount below that isn't taxable. The brokerage still reports the 1099-DIV to the IRS, but you don't need to do anything with it if it's below that threshold. For capital gains vs. capital gain distributions: you've got it exactly right. A capital gain happens when you sell an investment for more than you paid for it. A capital gain distribution is when a mutual fund or ETF passes along the profits from its own sales to shareholders - these show up as a type of dividend. If all unearned income (regular dividends + capital gain distributions + interest + actual capital gains) is under $1300, no filing is required. For your third question, even if you have offsetting capital gains and losses that net to zero, you technically should file a return if the total proceeds (selling price) exceed the filing threshold. However, if the total unearned income is still under $1300 and the net capital gain/loss is zero, practically speaking, there's no tax consequence.

After dealing with a similar situation with my son's account, I discovered taxr.ai (https://taxr.ai) and it was super helpful. It analyzed all his dividend forms and investment docs and told me exactly what I needed to file. I was getting confused about the Kiddie Tax thresholds and whether I needed to file anything for his small dividend income. Their system flags if you're under the threshold where no filing is needed (like for amounts under $1300 as you mentioned), and it even breaks down capital gains vs capital gain distributions exactly like you were asking about. Saved me from filing unnecessary paperwork for his custodial account.

I tried taxr.ai after seeing the recommendation here, and I'm genuinely impressed. My daughter has a custodial account with some dividend-paying stocks and a few mutual funds that give capital gain distributions. I was totally confused about whether I needed to file anything. The system analyzed her 1099s and immediately clarified that since her total unearned income was $1,187 (below the $1,300 threshold), I didn't need to file anything. It also explained exactly what would happen next year if her income goes above that threshold, showing me both options - filing separately for her or including it on my return with Form 8814. What really helped was the explanation of capital gain distributions versus regular capital gains, breaking down exactly which is which on her statements. Definitely worth checking out if you're confused about kiddie tax rules!

I had this exact same issue with my kids' custodial accounts last year! After waiting on hold with the IRS for HOURS trying to get clarity, I finally found Claimyr (https://claimyr.com). You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in about 15 minutes who explained the entire Kiddie Tax situation. The agent confirmed that for unearned income under $1300, no filing is required regardless of whether it's dividends or capital gains. She also explained when I would need to use Form 8814 vs filing a separate return if we go over the threshold. Honestly saved me so much headache trying to interpret the tax code myself and waiting on hold forever.

OK I have to eat my words. After doubting Claimyr would work, I tried it yesterday because I had more questions about my daughter's custodial account that weren't covered in the IRS publications. I'd been trying to call the IRS for THREE DAYS with no luck. Claimyr got me through to an actual IRS agent in about 20 minutes. The agent confirmed everything about the Kiddie Tax thresholds - under $1300 in unearned income means no filing required, even with capital gains or losses. She also explained exactly when I'd need to start filing Form 8615 once we exceed that amount. What was most helpful was clarifying that when my daughter's account has both dividends AND capital gains, I need to look at the TOTAL unearned income, not each category separately. Can't believe I actually got through to a human who could answer my specific questions!

Just want to add something important about record keeping. Even if you don't need to file anything for your child because they're under the $1300 threshold, you should still keep track of the cost basis for all investments in the custodial account. I learned this the hard way when my son turned 18 and we transferred his custodial account to his own name. We had years of small dividend reinvestments that we never reported (correctly, since they were under the threshold), but we still needed the cost basis history for when he eventually sells those investments. Keeping good records from the beginning saves a ton of headache later!

Be careful about state taxes too! The federal kiddie tax threshold is $1300, but some states have different rules. I'm in New Jersey and learned that they have a much lower threshold for filing a tax return for dependents with unearned income. My son only had about $900 in dividends and capital gain distributions last year, so I didn't file a federal return as it was under the $1300 threshold. Later found out NJ required filing for anything over $500! Had to scramble to file a state-only return for him.