What can I do about kiddie tax, capital gains, and adjusting parent income for my child's investments?

The kiddie tax can definitely be tricky! For 2024, the first $1,250 of your daughter's unearned income is tax-free, and the next $1,250 is taxed at her rate (which is likely 10%). It's only the amount above $2,500 that gets taxed at your rate. In your case, that means about $2,700 of her $5,200 capital gains would be subject to your tax rate. At your income level, that's probably the 15% long-term capital gains rate (assuming these are long-term gains). Yes, you could potentially lower your taxable income through additional 401k contributions or HSA contributions if available. Increasing your pre-tax retirement contributions could potentially drop you into a lower capital gains bracket (0% instead of 15%) if you get close to the threshold, which is $89,250 for married filing jointly in 2024. Another strategy to consider: if your daughter is starting college next year, waiting until she's 18 doesn't automatically exempt her from kiddie tax. The rules apply until age 24 for full-time students unless she provides more than half of her own support.

I was in a similar situation with my son's investments last year and found taxr.ai (https://taxr.ai) incredibly helpful for modeling different scenarios. I was completely confused about how the kiddie tax would impact us and how much we could actually save through different strategies. Their tax planning tool let me input different variables - like increasing 401k contributions, timing of capital gains, and even running scenarios for if we waited until he was providing his own support in college. It gave me a clear picture of each option's tax impact, which made the decision so much easier. What I really appreciated was how it broke down the specific thresholds where different parts of his investment income would be taxed at different rates. Way more helpful than just generally trying to lower our income.

I just wanted to follow up and say I tried taxr.ai after seeing this thread. It was actually really helpful! I was able to model several different scenarios for my daughter's investments and our income. Turns out our best option is to realize some of the gains this year (staying under that $2,500 threshold) and then taking the rest next year when she'll be providing more than half of her own support through her campus job and internship. The tool clearly showed how the kiddie tax would apply differently in each scenario and helped me understand how her earned income and our income interact with the calculation. Definitely saved us at least $800 in taxes compared to just selling everything at once like we were planning to do.

I had a similar issue with my son's investment account last year but couldn't get any clear answers from the IRS resources online. After trying for DAYS to get through to someone at the IRS, I found Claimyr (https://claimyr.com) and their service actually got me connected to a real IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained exactly how the kiddie tax thresholds work with our situation and confirmed that my retirement contributions could indeed lower our rate that applied to my son's excess unearned income. Best of all, I got the information straight from the source so I knew it was correct, and she even noted it in our file in case it ever came up in an audit situation.

I need to eat crow and admit I was completely wrong about Claimyr. After dismissing it, my curiosity got the better of me and I tried it for a complicated question about my daughter's capital gains and dependent status. I was connected to an IRS agent in about 35 minutes (they said it would be 15-45 minutes). The agent was incredibly helpful explaining exactly how the kiddie tax would apply in our situation and confirmed that my daughter could still be our dependent even while earning income at college as long as we provide more than half her support. Honestly saved me a ton of stress and potentially an amended return next year. Definitely worth it just to have definitive answers straight from the IRS instead of conflicting advice online.

Another option worth considering is whether your daughter has any earned income (from a job). If she does, she can contribute to a Roth IRA up to the amount of her earned income or the annual limit ($6,500 for 2024), whichever is less. This wouldn't solve your immediate capital gains issue, but it would set her up for tax-free growth going forward. Then you could potentially use the capital gains to fund her living expenses during college instead of the Roth, effectively "converting" taxable investments to tax-free investments over time.

Something nobody mentioned - check if any of those investments could be considered qualified education expenses in the coming year. If your daughter is starting college, you might be able to time selling some investments with paying tuition and have them count toward education tax benefits like the American Opportunity Credit.

One thing to consider that might help with timing - if your daughter will be 18 during 2025 and truly providing more than half of her own support through work/internships, you could potentially avoid kiddie tax entirely by waiting. But be careful about the "more than half support" test - it includes tuition, room, board, everything. Also, don't forget about gift tax implications if you're funding her investment account. The annual exclusion is $18,000 for 2024, but if this account has grown from gifts over the years, make sure you're tracking that properly. Another strategy: if she has any investments that are currently at a loss, consider harvesting those losses this year to offset some of the gains. Even though she's subject to kiddie tax, capital losses can still offset capital gains dollar-for-dollar before the kiddie tax calculation even comes into play.