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Your son or daughter is a 5th year college senior. It happens. And maybe more often than we realize. According to the National Student Clearinghouse it now takes on average 5.1 years to earn a Bachelor’s. Apparently those t-shirts that say “College: The Best 7 Years of My Life” aren’t just novelty items.

If your child has been dubbed a “Super Senior” by the Urban Dictionary, I have a strategy for improving your cash flow and skirting taxation. Let’s see if we can save some money before you write yet another check to the Bursar’s office.

But first you’ll have to beat the “kiddie tax.” Let me explain.

Parents often ask me if they can gift appreciated investments to their child who can then sell them (with little or any tax due) and use the proceeds to pay for school. It’s a clever suggestion but unfortunately the “kiddie tax” is a particularly well-written portion of the tax code (read: no loopholes!) that severely limits the ability to save on taxes.

However, if you are paying tuition for a Super Senior or graduate student, there may be an opportunity to beat the notoriously tough kiddie tax. The opportunity lies in the stated age requirements. Specifically, a student who turns 24 by the end of the relevant tax year is no longer a “kiddie” in the eyes of the IRS and is thus exempt from the tax.

Here’s the strategy to beat the kiddie tax – and maybe the Federal (but not state) capital gains tax in the process. This will work even if your Super Senior isn’t 24 yet:
Gift appreciated investments to your child.
Have your child sell the securities. Important: Do not sell the securities before the year in which they turn 24 years old! That could trigger the kiddie tax and could result in an ugly tax bill. If your child is 23 they will likely need to hold the stock until the next calendar year to sell without concern for the kiddie tax.
Depending upon when your child graduates and secures a full-time job, they may be exempt from long-term capital gains taxes. Long-term capital gains tax is currently waived for those in the 10-15% tax bracket.
Want to milk it?

If you live in certain states like Ohio your child can take the proceeds from the sale of the investment, contribute to a 529 plan and pick up a state tax credit. Ohio even offers unlimited carryforward of said credit. A perfect graduation present.

Have a question or want to see if this strategy will work for you? Feel free to give me a call. I can ensure you don’t run afoul of all the rules (too numerous to mention here) and determine the maximum amount of the investment that can be sold without triggering Federal capital gains tax liability.

The articles presented on this blog are general in nature and should not be assumed to be applicable to your situation. In addition, tax law changes daily and the articles on this blog are not updated to reflect these changes. Anyone receiving any part of the information on this blog should not rely on or act or refrain from acting on the basis of any matter or information contained in this blog without seeking appropriate tax, legal or other professional advice. The transmission and receipt of information contained on this blog does not form or constitute a client relationship. Nothing in this blog constitutes legal advice. Opinions rendered by tax professionals are not authority.  You agree to hold Brendan Willmann, EA, forever harmless from any liability for your use or failure to use the information, advice, referrals, or suggestions provided by this blog at any time.