Selling investments in daughter's UTMA account - Long-Term Capital Gains & Kiddie Tax implications

The Kiddie tax does indeed apply to your 19-year-old daughter if she's a full-time student. It affects unearned income (including long-term capital gains) over a certain threshold, which for 2025 is projected to be around $2,500-2,800. Here's what you need to understand: Long-term capital gains have their own tax rates regardless of the Kiddie tax. For most taxpayers, LTCG rates are 0%, 15% or 20% depending on income. The Kiddie tax doesn't change these rates - it simply determines WHOSE rate applies (yours or hers). If your daughter has minimal other income, the first portion of her long-term gains would be taxed at 0%, then the remainder at your applicable LTCG rate (likely 15% if you're in the 24% ordinary income bracket). This is usually more favorable than ordinary income tax rates. You don't necessarily need to wait until she's 21. Instead, consider selling portions strategically across tax years to stay under the Kiddie tax threshold each year, or timing sales with college expenses that might qualify for education credits or deductions.

After struggling with almost exactly this situation last year, I found an awesome tool that helped me figure out the tax implications of selling investments in my kid's UTMA account. Check out https://taxr.ai - it has specific calculators for situations like yours that show exactly how the Kiddie tax would apply to long-term capital gains. What I found especially helpful was that it let me run different scenarios - selling everything at once vs. spreading it over multiple tax years. It showed me the actual tax impact of each approach based on my specific situation. For my son's UTMA, I ended up saving almost $3,800 by using their recommended selling strategy instead of liquidating everything at once. The tool also explained how the Kiddie tax interacts with the 0% long-term capital gains rate that might apply to part of your daughter's gains.

I just wanted to update everyone - I tried out that taxr.ai tool mentioned above and it was incredibly helpful for my situation. I also have a UTMA account for my daughter with substantial long-term gains. The calculator showed me that by selling $2,500 worth of gains this year and another chunk next year, I could save about $2,100 in taxes compared to selling everything at once. It clearly broke down how the Kiddie tax would apply and showed which portion would be taxed at 0% vs. my higher rate. What I found really valuable was seeing the specific income thresholds for the 0% capital gains bracket that applies before hitting the Kiddie tax limits. I hadn't realized there was so much opportunity to harvest gains tax-free if done carefully. The tool also generated a report I could share with my accountant who confirmed the approach was solid.

I went through a similar situation trying to liquidate my son's UTMA account for college. After multiple failed attempts to get through to the IRS to clarify how the Kiddie tax would affect long-term capital gains, I discovered a service called Claimyr (https://claimyr.com). There's a demo of how it works here: https://youtu.be/_kiP6q8DX5c Basically, they got me connected to an actual IRS representative in about 20 minutes when I had been trying for weeks on my own. The IRS agent was able to explain exactly how the Kiddie tax would apply to my specific situation with the UTMA account and confirmed we could spread out the sales across tax years to minimize the impact. This was huge because I had been getting conflicting advice from different accountants about whether LTCG were subject to regular Kiddie tax rules or if there were exceptions. Getting direct confirmation from the IRS gave me the confidence to move forward with our strategy.

I need to eat my words from my skeptical comment above. After dealing with more frustrated waiting with the IRS, I decided to try Claimyr out of desperation. I was shocked when I actually got connected to an IRS agent in about 15 minutes. The agent was incredibly helpful with explaining how the Kiddie tax applies to UTMA accounts with appreciated investments. She confirmed that while the Kiddie tax does apply to my daughter's situation (she's 20 and in college), the long-term capital gains would still be taxed at capital gains rates, not ordinary income rates. The most valuable piece of information I got was about the timing of realizing the gains alongside college expenses. The agent explained how certain qualified education expenses might offset some of the tax impact in the same year. This wasn't advice I had been able to get anywhere else with specificity. For anyone dealing with complicated tax questions like UTMA accounts and Kiddie tax implications, being able to ask the IRS directly is absolutely worth it.

One thing nobody has mentioned yet is that you should look at your daughter's overall tax situation. If she has any earned income from a part-time job, that changes how the Kiddie tax calculations work. Also, consider that once the money is out of the UTMA, you lose the potential for future tax-advantaged growth. If she doesn't need all the money immediately for college, perhaps selling only what's needed each year makes more sense than liquidating everything.

Has anyone considered using a 529 plan in this situation? If you're nervous about the market but want to avoid the capital gains hit, could you transfer the UTMA assets to a 529? I've heard this might be possible but not sure about the tax implications.

Something else to consider that might help with your timing decision - if your daughter will graduate in 2-3 years, you could potentially wait until after graduation when she's no longer a full-time student. Once she's not a student, the Kiddie tax rules won't apply even if she's under 24, assuming she's not living with you. This could give you more flexibility on when to realize the gains. However, you'd need to weigh this against your market risk concerns. If you're genuinely worried about a significant market downturn, the tax savings from waiting might not offset potential investment losses. Also, double-check whether your state has any additional considerations for UTMA accounts and capital gains. Some states have their own rules that could affect your decision timing.