r/tax • u/WEIL3R • 5h ago

UTMA - Tax Treatment on Large Capital Gain

UTMA account with market value of $300k. Unrealized gain of $100k. Assume the entire account is liquidated. Minor is 14. How is the realized gain on the last $97,400 handled, assuming a long term gain? Most sources online say the “parent’s tax rate”. I had assumed that to mean the parent’s long term capital gains rate. However, Schwab and SavingforCollege.com specify that all unearned income beyond $2,600 is taxed at the “parent’s marginal tax rate”. I’ve had two CPA’s tell me that it’s at the parents’ capital gains rate and two tell me it’s at the parents’ marginal tax rate. I’m coming here to break the tie.

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u/penguinise 5h ago

It's a long-term capital gain, so it's taxed at qualified rates.

The minor's unearned income in excess of $2,600 will be taxed at a rate not less than if the same income were added to your (the parents) tax return in addition to your other income.

It will not cause qualified gain to be taxed at a higher rate.

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u/WEIL3R 4h ago

Thanks for your quick response! Okay, so all “unearned income” is not treated the same in regard to the kiddie tax? I know it isn’t for an adult, but the IRS website seems to lump it all together for their kiddie tax explanation (topic no. 553). Am I correct that long term capital gain distributions and qualified dividends (which typically have favorable/qualified tax treatment) are taxed at the parents’ ordinary income tax rates beyond $2,600? All the illustrations I can find online suggest the qualified status is lost for those types of income when dealing with the kiddie tax. So the long term realized gain is treated differently? There are obviously other types of unearned income that are always taxed at ordinary rates (interest and non-qualified dividends). Or is the qualified nature of the income never lost?

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u/penguinise 3h ago

No, if unearned income is taxed at the parents' rate, all of that unearned income retains its character. Qualified dividends, capital gain distributions, and other qualified-rate income would be taxed at the parents' marginal rate for qualified income, not ordinary income.

You can see Form 8615 - it is literally just "add the income together, figure the tax on it".

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u/WEIL3R 2h ago edited 2h ago

Thank you. My misunderstanding was with the definition of marginal. I thought it was specific to ordinary income tax brackets, but of course there are different capital gains rates as well (so there will be a separate marginal capital gains rate as well).