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[[My 12-year-old son has more than \$4000 in capital gains this year. I understand that the first \$700
will be tax-free.]]

Correct...and let's assume for this example that this is the ONLY income that you child has this year. If this unearned income is combined with earned, the computations get even more complicated.

[[ Then the next \$700 (?) will be taxed at his rate of 15%,]]

That assumes that the capital gains are short term. If they are long term, then the child's rate will be 10% on thes long term gains...since your child does receive the benefit of the preferred tax on long term capital gains.

[[ and then the rest will be
taxed at the highest rate we are paying.]]

That is basically correct. Again, if the gains are short term, that will be at your "marginal" tax rate. If the gains are long term, the max tax could be 20% (or even less...depending upon your marginal tax rate).

[[ How do we take advantage of paying a lower rate when
some of the gain is of long-term ? Since I don't have all the forms in yet, I can only guess that our
tax rate will be right at the border line between 28% and the one level up. Therefore, I assume that
the "overflow" from my son's captial gains will be taxed at that rate.]]

Again, if his gains are short term, the "overflow" will be taxed at your marginal rate. If the gains are long term, and you are in the 28% bracket or higher, you son will still receive the benefit of the 20% capital gains rate.

[[ But wouldn't it be unfair if
those gains are of long-term nature when people can pay either 10% or 20% rate?]]

Yes...it is. Which is why they don't. My best suggestion to you would be to review IRS Form 8615 and the associated instructions (or even Form 8614 and instructions). You'll see how it really all should work...even if the funds are not yet current.

[[ Thanks to

Hope this helps...
TMF Taxes
Roy