How to report sale of Stock

[Absolut]

Client has a 9 year old child, father invested money w/ Charles Schwab for son in 1996, father closed the account with Schwab on 10/25/05 and switched to American Funds in the same year.

Here's how the transaction is reported from Charles Shwab on a 1099, this is reported under the sons SS#:

Bouht Stock on 9/30/96 for $2,080.38

Sold Stock on 10/25/05 for $2,135.70

The sale makes a long term gain of $54.90

Do I have to report this on the parents tax? (It says the child has to have over $800 in income, to report, and in reality he only made $54.90) but if you look at the check $2,135.70 that he & his father (father is custodian on the acct, as the acct. was set up in the year the child was born) received for the sale, it would be considered income, but it was the fathers money in the first place and he only gained $54.90 on it.

Another note is that this was reported to the child on a 1099, along with a small dividend of $3.09.

He took the $2,135.70 and reinvested with American Funds. Here's what I think:

Do I report the sale on the parents return or do a return for the Child?

[Bees Knees]

If the child's Social Security Number is listed as the payee on the 1099, you ALWAYS report the income on the child's return, unless you ELECT to report it on the parent's return. It is irrelevant how the child got the money to invest in the first place.

Since the child's income is below the paying tax threshold, report it on the child's return. However, the gross proceeds from the 1099-B exceed the filing requirements for the child, so you do need to file a return for the child, even though taxable income will be zero.

[Bees Knees]

the acct. was set up in the year the child was born...but it was the fathers money in the first place

This is called family income shifting. It use to be done all the time. The parents are in a high tax bracket. So they shift income to the kid by setting up custodial accounts for their kids using the kid's name and Social Security Number.

Of course it was not the kid's money to invest. It was the parent's. But the parents and grandparents would gift huge amounts of money to the kids each year to (1) take advantage of the kid's lower tax bracket, and (2) get money out of the parent's estate to avoid Estate Tax.

Congress closed that loophole in 1987 with the Kiddie Tax rules, in which the kid must pay tax at the parent's tax rate on unearned income in excess of $1,600 (2005 threshold).

[Bill Tubbs]

right on Bees...

Child files separate return, with Form 8615 attached [Form 8615 is attached only if total income above the Kiddee tax rules, which is not needed in this case]. So, must first finish parents' return.

If it had been interest instead of a Cap Gain, then that could have been elected to reported right on the parent's return. But, since it was Cap Gain, no such election -- child needs own return.

Bill

[Unregistered]

Bees
I have to disagree with your comment

"However, the gross proceeds from the 1099-B exceed the filing requirements for the child, so you do need to file a return for the child, even though taxable income will be zero."

It is advisable to file a return (to avoid IRS correspondence) but you do NOT NEED to file a return under the facts of the original post. SCA 200018051 concludes that a taxpayer is NOT required to file a return if their gross income is under the §6012(a) filing requirement regardless of the amount of proceeds reported on the 1099-B. The Service in this SCA goes on to say that is the technical answer but to head off any possible future questions from the Service, the taxpayer may want to file anyway.

New York Enrolled Agent

[Bill Tubbs]

Most decide to file...

It is advisable to file a return (to avoid IRS correspondence) but you do NOT NEED to file a return under the facts of the original post.

It has been my experience that nearly all clients in this situation decide to file the return to avoid the possibility of getting an IRS nasty-gram. But yes, you are correct, technically the return would not be REQUIRED.

Bill

[Bees Knees]

Bees
I have to disagree with your comment

It is advisable to file a return (to avoid IRS correspondence) but you do NOT NEED to file a return under the facts of the original post.

Thanks for the clarification. But a technical answer does no good in the real world.

I had a client once who didn't file a return for 10 years. He had hundreds of 1099-B transactions each year as a day trader. Never really made much money. Just a whole bunch of 1099-Bs. Basically, it was just the same $30,000 - $40,000 being exchanged for one stock after another.

The IRS completed tax returns for him and sent him a bill for $6 million in taxes owed, based on the 1099-Bs. That motivated him to get his stuff together for me to do his returns. He wound up getting refunds for the open years and no balance due for the closed years.

The IRS didn't have any reason to know what his basis was in all of those 1099-B transactions, even though technically he did not owe any additional tax as a result of all those trades.

[Absolut]

Sale of Stock

I filed a return for the child, but I didn't attach the 8615 is this going to be a problem?

[Bees Knees]

No because taxable income is under $1,600, so none of it would be subject to the parent's tax rate.

[Absolut]

Sale of Stock

Thanks Bees.