To the extent the child actually has For the purpose of these rules, the determination of what constitutes “support” is the same as the “Support Test” in determining whether a child is a dependent.
Which means older students – e.g., already age 24 and in graduate school – do not face the kiddie tax. And while it’s probably not a reason to get married, those who married and filing a joint tax return avoid the kiddie tax as well (even if not otherwise generating enough earned income to meet the support test).
In the end, while the potential for shifting appreciated stock to take advantage of 0% capital gains tax rates is somewhat limited, both by the annual gift exclusion, the kiddie tax rules, and the size of the bottom tax brackets at which the 0% rate applies, there is still a potential to generate a material amount of tax savings over time.
Because determining support includes education expenses, tuition alone may constitute the largest support expense, and for private colleges the total cost of attendance alone can add up significantly (an average of $44,750 for a “moderate” private college in 2013-2014).
On the other hand, for those going to a public university, the threshold is lower, but still a non-trivial average of $22,826 in 2013-2014 for in-state attendance.
The end result: a $2,250 tax savings and a “free” capital gain (at least at the Federal level; state income taxes may still apply).
If the stock is owned in the parents’ name, it can be gifted to the child and with a gift-splitting election between husband and wife, stay under the ,000 per year per person annual gift exclusion (in 2015).
Alternatively, if the stock is already in the child’s name – e.g., in an UGMA or UTMA account – the stock (and its gains) already belong to the child, and it’s simply a matter of avoiding the kiddie tax to ensure it is taxed at the child’s 0% rates.
Notably, the fact that the child is actually earning income from wages or self employment – to avoid the scope of the kiddie tax – can push up the child’s total taxable income, potentially driving some capital gains out of the 0% rates.
Of course, the caveat to avoiding the kiddie tax for a full-time college student is that the student must actually generate income, which means some kind of job that generates wages or self-employment income.