What is the impact of capital gains on children's investments and savings?

The impact of capital gains on children's investments and savings depends on several factors, including the type of investment, the amount of capital gains realized, and the child's overall income and tax situation. Here are some key points to consider:

1. Kiddie Tax: The Internal Revenue Service (IRS) imposes the "kiddie tax" on children's unearned income above a certain threshold. Unearned income includes capital gains, dividends, and interest. Prior to 2018, the kiddie tax applied the parents' tax rate to the child's unearned income. However, under current tax laws, the kiddie tax applies the trust and estate tax rates to a child's unearned income over a certain threshold. The specific tax rates and thresholds can change, so it's essential to consult with a tax advisor or review the IRS guidelines to determine the current rules.

2. Capital Gains Tax Rates: If a child's unearned income, including capital gains, exceeds the threshold for the kiddie tax, the capital gains will be subject to capital gains tax rates. The actual tax rates will depend on the child's income and the type of asset sold. Generally, longterm capital gains are taxed at lower rates than shortterm capital gains.

3. TaxAdvantaged Accounts: Parents may choose to save for their child's future through taxadvantaged accounts such as a 529 college savings plan or a custodial account, such as a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. The tax treatment of capital gains within these accounts varies. For example, 529 plans provide potential taxfree growth and taxfree withdrawals for qualified education expenses, while UGMA/UTMA accounts may subject the child's investment income, including capital gains, to the kiddie tax.

4. Gifting Strategies: Parents or other family members may also choose to gift appreciated assets to children. In this case, the child's cost basis for the asset would generally be the donor's original cost basis, potentially resulting in a lower capital gains tax liability if the child sells the asset in the future.

It's crucial to consult with a qualified tax advisor who can evaluate your specific circumstances and provide guidance on the tax implications of capital gains on children's investments and savings. They can help you understand the applicable rules, consider taxefficient strategies, and ensure compliance with tax laws.