Can Capital Gains for an 18 Year Old Child be offset by the parents' tax loss carryforwards?

Forum|Forum|7 years ago
April 12, 2019
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My 18 y.o. daughter started college in the fall and we sold some investments in her name to pay for it. It's the first time we tapped into the investments we saved for college. The sale triggered long-term capital gains and it appears I have to file a return in her name for the first time. My wife and I are carrying long-term capital losses and would like to offset our daughter's gains with that.

She was under 18 when we made the investment sales. Can we use our tax loss carryforwards to offset her gains? Not sure if it makes a difference but her fund sales easily exceed more than the annual contribution we provided her, so she could claim to be independent if there's an advantage to that.

What can and should we do? Thanks.

Best answer by PaulaM

If these are your daughter's investment then the gains are reported on her return. She'll need to file her own return if her gains exceed $1,050. You can only elect to include a child's interest and dividend income on your return. You can't offset her gains with losses of your own. See links below for reference.

Does my dependent need to file a return?

IRS topic 553

PaulaMAnswer

Employee

Does my dependent need to file a return?

IRS topic 553

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TaxDonorAuthor

Employee

Thank you for your reply and reference. I've always been confused about what's considered unearned income for a child.

In your referenced IRS Topic 553, it says in #2 that unearned income is interest and dividend income (including capital gain distributions).

By implication, that means other capital gains like the intentional sale of mutual fund shares is not unearned income and considered earned income. Is that correct?

PaulaM

Employee

In reference to IRS Topic 553, interest and dividend income (including capital gain distributions) where capital gains are from distributions-not sales.

Selling shares in mutual funds/stocks resulting in a gain is unearned income not earned income. This is taxable on the dependent's return if greater than $1,030. Generally, earned income is from endeavors that involve your labor in some form. See the following link for earned income reference.

What is earned income?

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