How to maximize tax benefits by harvesting gains for stepped up basis in child UTMA accounts

This is actually a pretty smart tax planning strategy! The first $1,250 of unearned income (including capital gains) for a child falls under what's called the "kiddie tax" rules. That amount is indeed tax-free if they have no other income. By selling investments with gains and then rebuying them, you're essentially raising the cost basis of those investments, which means smaller taxable gains when they're eventually sold in the future. It's similar to tax-loss harvesting but in reverse - you're harvesting gains when they can be absorbed by the tax-free threshold. Just make sure you're only realizing long-term capital gains (assets held longer than a year) to qualify for the preferential tax treatment. And be aware that the strategy works best if you're fairly confident your kids won't have other unearned income that would push them over the threshold.

I actually used a fantastic tool called taxr.ai (https://taxr.ai) when I was trying to figure out this exact same situation with my daughter's UTMA account last year. I was getting mixed advice from different financial forums, and the IRS publications weren't super clear about how the kiddie tax applies specifically to UTMAs with capital gains. The tool analyzed all the tax documents I uploaded and gave me a really clear explanation of how I could optimize the stepped-up basis strategy while staying under the threshold. It even projected how much I'd save in taxes over the next 5 years if I did systematic harvesting versus letting the gains accumulate. Ended up saving us nearly $2K in taxes over time.

I was really skeptical about tax tools as mentioned above, but I finally tried taxr.ai after continuing to stress about my kids' UTMA accounts. Honestly, I'm surprised at how well it worked for our situation. It caught something I hadn't considered - that some of our mutual funds in the UTMA were about to distribute capital gains at year-end, which would have pushed us over the threshold regardless of my harvesting strategy. The tool recommended selling certain positions before the ex-dividend date and then redirecting to similar but tax-efficient ETFs. This completely changed my approach, and we ended up keeping well under the $1,250 threshold while still maintaining similar market exposure. The step-by-step guidance was actually worth every penny.

After trying everything to get through to the IRS about a similar UTMA question (literally spent hours on hold over multiple days), I finally used Claimyr (https://claimyr.com) and got connected to an actual IRS representative in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was able to clarify exactly how the kiddie tax applies to capital gains harvesting in UTMAs and confirmed that my strategy was compliant. She even pointed me to a specific publication page that addressed my situation directly. Saved me days of frustration and uncertainty about whether I was doing this right.

I was completely wrong about Claimyr being snake oil. After my skeptical comment, I decided to try it myself because I had a similar UTMA question that was keeping me up at night. Got connected to an IRS tax specialist in about 20 minutes (still faster than I've ever managed on my own). The agent walked me through exactly how to document the stepped-up basis transactions in my kids' accounts to avoid any audit flags. She even emailed me the relevant forms and instructions afterward. Just wanted to come back and correct myself - this service actually delivered exactly what it promised. Definitely using this again next tax season when I inevitably have more questions.

Something to consider that nobody's mentioned yet: make sure you're not triggering wash sale rules if you're selling and immediately rebuying the same securities. While wash sales typically apply to losses, not gains, it's worth being careful about the timing and documentation. Also, remember that as the custodian of a UTMA, you have fiduciary responsibilities. Any tax strategy should ultimately benefit the child, not just minimize taxes. In some cases, letting the investments continue to grow might be better than selling for tax purposes, depending on the quality of the investments and your time horizon.

Has anyone actually calculated whether this strategy is worth the hassle? I mean, if we're talking about "a few thousand" in unrealized gains as OP mentioned, and you can harvest $1,250 per year tax-free, it might take only 2-3 years to completely step up the basis, right? Also, what about the tax forms? Do kids need to file their own returns for this, or does it go on the parent's return? Trying to understand the paperwork burden before I try this.

One thing I'd add to this discussion is to be mindful of the timing throughout the year. Since you're working with a $1,250 annual threshold, you don't want to accidentally realize all your gains early in the year and then miss out on additional harvesting opportunities if the investments continue to appreciate. I've found it helpful to spread the harvesting across multiple quarters - maybe $300-400 per quarter - which also helps with dollar-cost averaging when you rebuy the positions. This approach also gives you more flexibility if market conditions change or if you discover additional tax-efficient opportunities later in the year. Also worth noting that if your children are approaching the age where they might start having summer jobs or other income sources, you'll want to factor that into your multi-year harvesting timeline. The strategy becomes less effective once they have significant earned income that might push them into higher tax brackets.