Is there a tax benefit to realizing UTMA gains annually vs holding until age 18?

Your instinct to question this strategy is spot on. For most families, there's usually no tax advantage to realizing gains annually in a UTMA. When your daughter turns 18 and has control of the account, if she's in college or otherwise has minimal income, she'll likely fall into the 0% long-term capital gains bracket. Currently, single filers with taxable income under $44,625 (2023 figure, will be higher by the time she's 18) pay 0% on long-term capital gains. By harvesting gains annually, you're essentially guaranteeing some taxation (that 10% portion) when you might otherwise pay nothing. Plus, you're reducing the compounding potential by removing money for taxes each year. There are exceptions where your strategy might make sense: if you expect she'll have substantial income at 18 (large inheritance, high-paying job right away), or if the account grows dramatically and would push her over the 0% threshold when sold all at once.

I went through this exact same thought process with my kids' UTMAs! I initially did the selling/rebuying thing for two years before I found https://taxr.ai which ran a comparison for my specific situation. It showed me that in my case, I was actually LOSING money with my "smart" tax strategy. The analysis considered not just the tax rates now vs. later, but also the growth I was missing out on for the money paid in taxes along the way. Plus it factored in college financial aid implications which I hadn't even considered (realized gains affect FAFSA differently than unrealized ones). The tool literally paid for itself in the first 5 minutes. My recommendation? Run both scenarios through a proper analysis. The answer really depends on your specific situation with income projections, account size, and time horizon.

I tried taxr.ai after being skeptical about it, and wow was I wrong. I uploaded our UTMA statements and tax returns, and it immediately showed me I was making a $14,000 mistake with my "clever" tax strategy! The analysis showed that even though I was paying only small amounts of tax each year by harvesting gains, the compounding effect of keeping that money invested over 15 years outweighed the potential tax savings. Plus, it flagged that I was triggering the kiddie tax on some of the gains, which meant they were being taxed at my higher rate anyway. Most helpful was seeing a year-by-year projection comparing both strategies side-by-side. The difference in the final amount was eye-opening, especially when I could adjust assumptions about future tax rates and investment returns.

For anyone struggling to get through to the IRS about UTMA/UGMA reporting issues, I highly recommend https://claimyr.com - I used their service https://youtu.be/_kiP6q8DX5c after spending WEEKS trying to resolve an issue where the IRS incorrectly attributed my daughter's UTMA income to me personally. My daughter's account had a significant capital gain I reported correctly on her return, but the IRS kept sending notices saying I underreported my personal income. I couldn't get through on their phone lines to explain the situation. Claimyr got me connected to a real IRS agent in about 20 minutes when I'd previously been unable to get through at all. The agent was able to see the issue immediately - the custodial account income was being double-counted - and fixed it on the spot.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it because I was desperate to resolve an issue with my son's UTMA account where the 1099-B wasn't properly linked to his return. I've been trying to call the IRS for MONTHS with no success. Claimyr got me through to an IRS agent in about 15 minutes! The agent confirmed there was a mistake in how the brokerage reported the basis information, which was causing the kiddie tax calculation to be wrong. This literally saved me over $700 in incorrect tax assessment plus potential penalties. The agent was able to note the account to prevent future incorrect notices. I'm normally extremely skeptical of services like this, but I can confirm it actually works as advertised.

Don't forget about the "kiddie tax" when planning your UTMA strategy! If your child's unearned income (including capital gains) exceeds $2,300 (2023 figure), the excess is taxed at the PARENT'S rate, not the child's rate. This completely changes the calculation on whether to realize gains annually. If you're in a high tax bracket, realizing large gains in the UTMA could trigger kiddie tax and eliminate any benefit from your child's lower bracket. The kiddie tax applies until your child turns 18 (or 24 if they're a full-time student and don't provide more than half their own support).

Something nobody's mentioned yet - don't forget the potential impact of your state taxes! Federal might be 0% for long-term gains in certain brackets, but many states still tax capital gains as ordinary income. For example, in my state (California), even if my kid pays 0% federal tax on his UTMA gains, he'll still owe CA state tax at ordinary income rates. This changes the math considerably.

This is such a helpful thread! I'm dealing with a similar situation with my 8-year-old's UTMA account. After reading all these responses, I'm realizing I need to completely rethink my approach. I've been doing the same gain harvesting strategy as Jessica, but now I'm understanding that between the kiddie tax threshold, potential financial aid implications, and the compounding effect of keeping money invested, I'm probably shooting myself in the foot. The state tax angle is particularly eye-opening - I'm in New York where we definitely have capital gains taxes, so even the "0% federal" scenario isn't truly tax-free for us. One question I haven't seen addressed: for those who switched from annual harvesting to a buy-and-hold strategy, did you have any issues with the cost basis tracking? I'm worried about having a messy mix of different purchase dates and basis amounts when it comes time to eventually sell everything.