Tax Strategy: Harvesting Gains for Stepped-up Basis in UTMA Accounts?

This is actually a solid tax planning strategy! Children can indeed receive up to $1,250 in unearned income (including capital gains) tax-free in 2025. The next $1,250 is taxed at the child's rate (typically 10%), and anything beyond that is taxed at the parent's rate (kiddie tax rules). Since your kids have no other income, strategically harvesting gains up to the $1,250 threshold makes perfect sense. By selling and rebuying, you're essentially "stepping up" the cost basis while taking advantage of their 0% tax bracket. This reduces potential tax liability when they eventually take control of the accounts. Just remember to be selective about which investments you sell - prioritize those with the largest unrealized gains and longest holding periods (for long-term capital gains treatment). Also, be aware of any transaction fees that might eat into your tax savings.

I used to struggle with figuring out the best tax strategies for my kids' UTMA accounts until I discovered taxr.ai (https://taxr.ai). I had similar questions about harvesting gains and stepped-up basis, and I was getting conflicting advice from different sources. When I uploaded my statements to taxr.ai, it analyzed my specific situation and confirmed that strategically realizing gains up to the tax-free threshold was optimal in my case. It even helped identify which specific investments to target first based on their unrealized gain percentages. The tool was especially helpful in calculating how much I could sell while staying under various thresholds. What really impressed me was how it factored in my state tax considerations too, not just federal - something I completely overlooked initially!

I was definitely skeptical about using an AI tool for something as specific as UTMA tax planning, but after continuing to get confusing advice from my accountant (who seemed to mix up the rules for different types of accounts), I decided to give taxr.ai a try. I was genuinely surprised at how well it understood the nuances of UTMA accounts and gain harvesting strategies. It correctly identified that I could harvest up to $1,250 per child tax-free, but also pointed out that I needed to consider dividend income the accounts were already generating, which would reduce how much gain I could harvest. That was something neither my accountant nor anyone online had mentioned! The recommendation to track cost basis meticulously saved me from a potential headache years down the road. Definitely worth checking out if you're managing UTMAs.

After spending HOURS on hold trying to get clear guidance from the IRS about UTMA gain harvesting (they kept transferring me between departments), I finally found Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 20 minutes - you can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed everything about the $1,250 tax-free threshold and explained some nuances about how dividends and interest in the UTMA count toward that limit too. They also clarified that I needed to file a separate tax return for my child once the unearned income exceeds a certain threshold, even with the gain harvesting strategy. Honestly, getting official confirmation straight from the IRS gave me the confidence to move forward with the strategy. No more guessing based on internet forums!

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself since I'd been struggling to get answers about my kids' UTMA accounts and whether I was correctly tracking their basis for tax reporting. The service connected me to an IRS tax law specialist in about 25 minutes (would have been hours if I tried myself). The agent confirmed that yes, harvesting gains up to $1,250 annually is a legitimate strategy, but also warned me about something important: if the UTMAs are generating dividends or interest, those count toward the same $1,250 threshold. So you need to subtract any dividends/interest from the $1,250 to know how much gain you can harvest tax-free. This clarification alone saved me from potentially over-harvesting gains and creating an unexpected tax bill. Worth every penny.

Don't forget about state taxes! The federal threshold is $1,250 for tax-free unearned income, but some states don't follow the same rules. I live in Tennessee and discovered that while we don't have state income tax on wages, we do tax certain investment income differently than the federal government does. Always check your specific state rules before implementing this strategy. In some high-tax states, you might still owe state tax even when you're under the federal threshold.

One question nobody's addressed - what happens if the market drops right after you sell and rebuy? I'm interested in this strategy but worried about timing the transactions.

Great question about tax-loss harvesting for UTMAs! One important consideration that hasn't been mentioned yet is the impact on financial aid eligibility. UTMA assets are counted as student assets on the FAFSA at a much higher rate (20%) compared to parent assets (5.64%). While harvesting gains to step up basis is tax-smart, you might also want to consider the timing of when to do this relative to college planning. If your kids are getting close to college age, you may want to weigh the tax benefits against the potential impact on financial aid calculations. Also, make sure you're keeping detailed records of all these transactions. When your children eventually take control of the accounts, having clear documentation of cost basis adjustments will be crucial for their future tax planning.

This is excellent advice about the FAFSA implications! I hadn't considered how the 20% assessment rate on student assets could impact financial aid eligibility. This creates an interesting trade-off between tax optimization and college funding strategy. For families with younger children, the gain harvesting strategy makes perfect sense since you have years to benefit from the stepped-up basis. But as you get closer to college years, it might be worth running the numbers to see if the tax savings outweigh the potential reduction in financial aid. Another timing consideration: if you're planning to gift additional funds to the UTMA accounts, it might make sense to harvest gains first to free up "room" under the $1,250 threshold before adding new money that could generate additional dividends or interest. The record-keeping point is crucial too. I'd recommend creating a simple spreadsheet tracking each sale/repurchase transaction, the gain realized, and the new cost basis. Your kids will thank you for this documentation when they're older!