Income tax question - any experts? (1 Viewer)

[Jon_Are]

My 13-year-old daughter has some mutual funds. What are the income tax implications? I understand that minors are liable for some (lower) tax rate than adults, but at what age does this begin? Does she need to file her own return?

Also...the funds have not earned any income the past few years. Am I OK just not mentioning them, if there have been no gains? Or do I have to file something demonstrating that there has been no income.

Thanks!

Jon

 

[Bill Slack]

Any taxes on dividends are generally (maybe always) taken care of by the fund itself. Beyond that, has she realized any income?
Even if was received as gift(s), any gift amount under $11k is not tax exempt (this amount is per giver, not receiver.) And then once it's invested, no unrealized gain means anything. It's when it's sold that you have to pay capital gains tax.
AFAIK, a minor is liable for taxes in the same way any adult is. Otherwise those highschool NBA players would _really_ be living it large!
There are also life-time gift exceptions you can give up to a certain amount.

 

[Jon_Are]

Thanks, Bill

This stuff is confusing for me, so bear with me...

She has realized no income from the fund in 2002.

Am I safe doing nothing at all with regard to filing on this fund?

And suppose she had received dividends (which would have automatically been re-invested in more shares); would this be reportable/taxable?

Thanks again,

Jon

 

[Bill Slack]

It's taxable, but the fund should have already paid taxes on it since they are just used within the fund to buy more shares. If the fund actually pays out dividends, that's different; then it's just plain old income. In this case you should receive a 1099 form.
A dependant is often just filed on your tax return, but as you thought, there are extra benefits because of her age:
http://www.quicken.com/cms/viewers/a...54168#howtaxed
So, basically... you don't need to worry about any of this.

 

[Michael Reuben]

It's taxable, but the fund should have already paid taxes on it since they are just used within the fund to buy more shares.

Sorry, but that's wrong. Whether the dividends are automatically reinvested or not is irrelevant. Dividends paid by a mutual fund are taxable, and the shareholder is responsible for paying those taxes. Indeed, the whole point of being a registered investment company (which is what a mutual fund is) is that there are no taxes paid at the fund level, only the shareholder level.

Jon, I suggest you consult a tax professional. The last time I looked at this (which was some years ago), children under age 14 were taxed at the top rate at which their parents are taxed. I suspect that's still true.

M.

 

[Bill Slack]

I meant dividends from the individual stocks within the fund, not dividends paid by the fund itself, and then automatically reinvested by the holder. I guess the individual holding don't really pertain, at all, but that's what I was thinking in my head. If the fund _itself_ pays dividends, like I said, that's different.
If I'm wrong about the above, that's news to me, but I've been wrong before. AFAIK, the fund should have the ability to just swallow up any dividends and have that increase the value of the fund rather than filtering it back out as a dividend, otherwise it forces a fund to pay a dividend (or invest elsewhere) when it may not want to.
The law says under 14 and you get a $750 exemption, and the next $750 is taxed at the childs rate, and the rest is taxed at the parents marginal rate (this is to avoid filtering significant income through your children to save money, basically.)
My assumption is any dividends aren't much (e.g., under $750) or you already would have consulted a tech professional, because that would be a pretty large dividend check to receive. And if she's got that much money at 13 invested, she should have someone doing this work for her already.

 

[Bill Slack]

Well... well... I guess in reading more the fund has to pay out dividends and distrbutions from capital gains, which you can then choose to re-invest.

I'm sure I learned that sometime, but I guess this is why I'm an engineer and not an accountant. And of course, with a 401k it's not something I need to pay very close attention to.

Anyway, you will get information from them telling you any distrubutions, and just go by that.

Sorry for the mis-information.

 

[Michael Reuben]

I guess in reading more the fund has to pay out dividends and distrbutions from capital gains

Exactly. If the fund fails to pay those out, it forfeits its ability to avoid taxes at the corporate level, which is one of the chief advantages of being a registered investment company.

M.

 

[Jon_Are]

I really do appreciate all the help, but I'm just as confused as ever.

Here it is in a nutshell: The fund earned very little - if any - dividends in '02.

Do I need to even mention it when I file my return?

At what point would I need to include (re-invested) dividends?

Thanks,

Jon

 

[nolesrule]

Usually, the investment company only sends a 1099 to the IRS if you have $10 or more in taxable investment income. But you are supposed to list all interest and dividend income earned on taxable accounts.

 

[Michael Reuben]

I'm just as confused as ever

Which brings me back to my original suggestion: Consult a tax professional. If it's important enough for you to ask advice, it should be important enough to get the advice from people who do this for a living.

Internet forums are rife with misinformation. With apologies to Bill Slack, this thread is a good example of how easy it is get advice that's given with all sincerity and the best of intentions, but is simply wrong.

M.