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Subject:  Re: custodial account Date:  12/15/1998  9:11 AM
Author:  TMFTaxes Number:  7205 of 127624

[[first year into custodial acct. for 6 yr old grand-
child with on-line brokerage firm. Have gained above
$650. ]]

But when you say "gained" you mean that you sold shares and realized capital gains of $650? Or does that mean that the value of your shares have increased by an amount of $650.

The first result (sold) is a taxable transaction. But the simple increase in value is NOT a taxable transaction.

So the answer to the question will depend upon your clarification. I'll assume that you meant "sold" the shares and realized a capital gain.

[[ question: before years' end do i need to liquidate back
into the account then buy right back in to the same
stock (still rising) in order to lock in the $650 of
unearned income allowed to be tax free for '98 and start at capital gains "0" for '99 ?]]

Well...maybe I had better assume that the account has increased in value, and you are LOOKING to sell the shares. Actually, for 1998 you can take up to $700 in income and still dodge the kiddie tax. And this is one method that many people use to realize some gains, avoid the taxes on those gains, and also increase the cost basis of the shares at the same time. It certainly works well for gains...not so well for losses (because the wash sale rules get in the way). So it is certainly something to consider.

But remember one thing: If you don't sell, you don't have taxes to pay. Or purchase/sale transaction fees. So, if you don't need the $650 or $700 right now, it may just be best to "let it ride", especially if it is in a stock that you like.

[[ question: if i should be in for long term investment
(several years in same stock) and don't liquidate back
into the account at each years end, do i forfiet the
tax exempt $650 of unearned income allowable per year
or does the tax advantage accumulate through the life
of the custodial account ? need to stay year to year
current? ]]

That annual "exemption" amount is just that...annual. If you don't use it on an annual basis, you lose it.

Check out my post on the kiddie tax issues in the Taxes FAQ area. Just remember that post is still using the $650 (old) rates rather than the $700 rates. But the theory and practice is still the same. You might find some additional information of interest to you there.

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