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My parents, saving for college many (20+?) years ago, purchased some Evergreen mutual funds for each of their children. I believe the accounts were established in the children's names.

Thanks to some scholarships and working for the school, I graduated with about $3500 left in that account.

Fast forward to 2013--the account has increased in value (through dividend reinvestment and appreciation) to about $6500.

Do I pay taxes on this gift of mutual funds?

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I gift my daughter stock worth $1000. No tax issue. She sells it for $2000, and has a taxable gain of $1000 that shows up on her return.

Yes, you need to find out the date of the gift, as that is the date you value the fund for cost basis. The $3500 isn't a concern, as the gift seems to have been given well before that. It's a long term capital gain when you sell it.

And, in a delightfully annoying aspect of our code, the dividends get added to basis each year, as you were paying tax on the dividend whether or not you actually received it. Depending on the level of dividends, your basis may very well be as high as the $6500 current value.

(pls ask if anything here needs clarification)

  • One question might be what happened from the time that the (presumably) UGMA account got converted to the OP's solo ownership on turning 18. Presumably all dividends and capital gains paid by the mutual funds (and reinvested in the funds?) were declared on the OP's tax returns and taxes paid appropriately. So, no gift tax is due, and income tax only on the dividends and capital gains paid out in 2013. – Dilip Sarwate Feb 5 '14 at 19:35
  • Age of majority shouldn't come into play. Removal of the custodial parent from the account should have no impact. Hopefully, the basis was tracked and increased each year. A minor's income may have been claimed on the parent's return, but that doesn't impact the basis increase each year. – JoeTaxpayer Feb 5 '14 at 19:58
  • The original gift was the price of the shares purchased on behalf of the OP and unless it was a huge amount, no gift tax would have been due. The question really is "Was income tax paid (if required) on the distributions from the mutual fund(s) after the OP took control of the account and the income was no longer subject to kiddie tax and reported on the parents' return. If not, there might be issues of income taxes, penalties and interest, etc for years prior to 2013 regardless of whether the basis was tracked or not. – Dilip Sarwate Feb 5 '14 at 20:03
  • I think we agree, although my answer assumes all was done correctly. You are warning about what might have gone wrong. The gift is the cash deposited to the account. The cost basis, the value when the shares were purchased. You can answer or edit in your concerns. All valid. – JoeTaxpayer Feb 5 '14 at 20:07
  • I have reported all interest and dividend income every year (it was never much in any one year) since I started filing my own taxes upon graduation from college. – Jeromy French Feb 5 '14 at 21:11
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First of all, in the U.S., no Federal gift tax has to be paid by the recipient of the gift; it is the donor who has to pay gift tax, if any is due. Nor does the recipient have to pay Federal income tax on the gift; it is not considered taxable income. I do not believe that any states view matters differently for the purposes of state gift and income taxes, but I am always ready to be disabused of any such fondly-held notions.

If your parents were required to pay any gift tax, that would have been at the time the gift was originally given and only if they gifted more than the maximum allowable exemption per person for that year. Currently the exemption is $14K from each donor per recipient per year. Additional gifts were made by your parents to you during your minority when your parents paid any income tax due on the distributions in your account, but these amounts would unlikely to have been larger than the exemption for that year. In any case, gift tax is none of your concern.

If you have been declaring the income from distributions from the mutual funds all these years, then the only tax due on the distributions from the funds in 2013 is the Federal income tax for the 2013 tax year (plus a special assessment of Medicare tax on investment income if your income is large; unlikely based on your question and follow-up comment). If you sold all or part of your shares in the funds in 2013, then you would need to calculate the basis of your investments in the fund in order to figure out if you have capital gains or losses. Ditto if you are thinking of cashing out in 2014 and wish to estimate how much income tax is due. But if you want to just hang on to the funds, then there is no immediate need to figure out the basis right away, though taking care of the matter and keeping in top of things for the future will be helpful.

As a final note, there is no tax due on the appreciation of the fund's shares. The increased value of your account because the fund's share price rose is not a taxable event (nor are decreases in the account deductible). These are called unrealized capital gains (or losses) and you do not pay tax on them (or deduct them as losses) until you realize the gains by disposing of the property.

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