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Author: stocks2grow Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121568  
Subject: DRIP and teenager - taxes on sale Date: 4/21/2009 12:21 PM
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Hi,

I am thinking of starting a Dividend Reinvestment Plan (DRIP) for my teenager with some of his money. I believe I would have to first get into the DRIP myself, then transfer to him (I doubt he can open his own). When a sale occurs, how do the taxes work? Do I account for any capital gain/loss on my taxes through the time I transferred to him, then the rest is on his tax return? (right now he doesn't have income and so does not fill out a tax return)

Thanks for any guidance,
Mike
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 105876 of 121568
Subject: Re: DRIP and teenager - taxes on sale Date: 4/21/2009 12:37 PM
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I am thinking of starting a Dividend Reinvestment Plan (DRIP) for my teenager with some of his money. I believe I would have to first get into the DRIP myself, then transfer to him (I doubt he can open his own).

You probably want a custodial account (or Uniform Transfers to Minors Account - UTMA for short) in his name. They're very common for minors.

When a sale occurs, how do the taxes work?

Just like always. He reports his activity on his return.

Do I account for any capital gain/loss on my taxes through the time I transferred to him, then the rest is on his tax return? (right now he doesn't have income and so does not fill out a tax return)

No.

If you were to make a gift of shares to him rather than cash, he'd take over your cost basis (with a twist - he'd use your cost for calculating gains and the FMV on the date of transfer - if it's lower - for calculating losses).

He'd report any gain or loss along with the dividends on his own return. If there is enough income - more than about $1800 or so - he would have a special income tax calculation that uses information from your return.

--Peter

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Author: stocks2grow Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 105877 of 121568
Subject: Re: DRIP and teenager - taxes on sale Date: 4/21/2009 1:04 PM
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Thanks Peter,

I checked the forms and there is a UTMA option, thanks for that suggestion. Do you know offhand - since he has no income now, so files no taxes (still in high school), when does he have to file a tax return? Seems like a "get started in the market" DRIP of only a few hundred dollars wouldn't be enough, but I'm not sure.

Thanks,
Mike

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 105879 of 121568
Subject: Re: DRIP and teenager - taxes on sale Date: 4/21/2009 3:06 PM
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I checked the forms and there is a UTMA option, thanks for that suggestion.

You're welcome.

Do you know offhand - since he has no income now, so files no taxes (still in high school), when does he have to file a tax return?

When he has enough income to require him to file a return. ;-)

How much is that? Well - it depends on the income.

As your dependent, his standard deduction in 2009 will be his earned income (think wages) plus $300, but not less than $950 and not more than the usual standard deduction. If his income is less than his standard deduction, he is not required to file a return. Since you're also looking at a stock investment, if he sells the stock, it is the gross sale proceeds you'll need to consider when calculating his filing requirement, not the profit on the sale.

So if he sells $10,000 worth of this stock he'll need to file a return. Even if his cost is more than the sale price.

Seems like a "get started in the market" DRIP of only a few hundred dollars wouldn't be enough, but I'm not sure.

Probably not. But you'll need to monitor it each year.

--Peter

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 105881 of 121568
Subject: Re: DRIP and teenager - taxes on sale Date: 4/21/2009 3:26 PM
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When he has enough income to require him to file a return. ;-)

Or withholding he'd like to get back.

One thing not entirely clear is that after a certain point, your marginal tax rate becomes his.

Good resource on UGMA - http://www.fairmark.com/custacct/

rad

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Author: stocks2grow Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 105893 of 121568
Subject: Re: DRIP and teenager - taxes on sale Date: 4/22/2009 11:08 AM
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Thanks again, quite helpful!

Mike

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