Do kids pay capital gain taxes?

[Beaglehound]

I was under the impression that capital gains can be accounted for as ordinary income, in which case a kid with no other income would be off the hook, assuming the gain is under the personal exemption limit (is it 480k these days?). I may be wrong though.

No, but in your defense most people seem to misunderstand this rule.

Does not apply to kids.

https://old.reddit.com/r/JapanFinance/c ... oth_a_tax/

So do kids not get the basic personal allowance before taxation kicks in that everyone else gets? Or perhaps that can’t be used for capital gains? I am not talking about the 200k exemption.

[TokyoBoglehead]

I was under the impression that capital gains can be accounted for as ordinary income, in which case a kid with no other income would be off the hook, assuming the gain is under the personal exemption limit (is it 480k these days?). I may be wrong though.

No, but in your defense most people seem to misunderstand this rule.

Does not apply to kids.

https://old.reddit.com/r/JapanFinance/c ... oth_a_tax/

So do kids not get the basic personal allowance before taxation kicks in that everyone else gets? Or perhaps that can’t be used for capital gains? I am not talking about the 200k exemption.

To my knowledge no. I cannot see why they would be granted an exception, am I missing something? I am far from an expert here, so please feel free to correct me.

[Beaglehound]

No, but in your defense most people seem to misunderstand this rule.

Does not apply to kids.

https://old.reddit.com/r/JapanFinance/c ... oth_a_tax/

So do kids not get the basic personal allowance before taxation kicks in that everyone else gets? Or perhaps that can’t be used for capital gains? I am not talking about the 200k exemption.

To my knowledge no. I cannot see why they would be granted an exception, am I missing something? I am far from an expert here, so please feel free to correct me.

Me neither on the expert front . Every taxpayer gets a 480k basic allowance against national income tax (430k for resident tax). See page 37 of this monstrosity of a document:
https://www.nta.go.jp/english/taxes/ind ... 021/01.pdf

I don’t see why kids wouldn’t be entitled to this too but perhaps they aren’t…

[ClearAsMud]

Me neither on the expert front . Every taxpayer gets a 480k basic allowance against national income tax (430k for resident tax).

I also claim ignorance of the finer points, but the basics concerning taxation of minors (children) seem pretty clear.

Individuals in Japan are responsible for their own taxes and -- unless they are company employees who receive a year-end adjustment and have an income below 20 million yen -- are required to file an income-tax return once their adjusted gross income for the year exceeds 480,000 yen. This includes minors. Anyone who files an individual income-tax return also receives a 480,000 personal deduction, thereby reducing taxable income. Returns for minors can be submitted by their parents or guardians; residence tax usually has lower filing requirements which must be checked with the municipality.

For children, several additional factors must be kept in mind. The first is labor laws regarding employment (child actors, for example, can receive an exemption from those laws). Second is that any income belongs solely to the child and any tax due must be paid by the child (a parent who pays the tax is providing the child with a gift). Third is that any funding provided by a parent to buy stocks in a child's name is considered a gift to the child and potentially subject to gift tax. Finally -- and possibly most easily overlooked -- once a child's adjusted gross annual income exceeds 480,000 yen, the child is no longer eligible to be claimed as a dependent on the parent's income-tax return, increasing the parent's taxable income. Furthermore, if the child's adjusted gross income exceeds the maximum allowed for a dependent (currently 1.3 million yen), the child also loses eligibility under the parent's social insurance, meaning that the child becomes responsible for paying his or her own health insurance and -- if actually employed -- any other required social-insurance premiums. Especially for this last reason, parents should take care to keep an eye on dividends and realized gains from their children's brokerage accounts.

In Japan, realized gains from NISA accounts are tax-free to begin with, and gains from assets in designated brokerage accounts have taxes withheld at the source, so those gains are excluded from income and don't affect dependents' eligibility for social insurance (i.e., you can have an unlimited amount of gains from either of these accounts and still qualify as a dependent). Foreign securities accounts, however, do not benefit from these considerations.

[alberto]

Thank you for all the useful comments. It was very informative. Just to add something that nobody said. It is true that investing on behalf of your kid, as long as your kid is the owner of the account, is seen as a gift or donation and it is taxable. However, there is an annual exemption of 1.1 million yen a year, so every parent can invest up to that amount on behalf of his/her kid without paying any taxes for the gift.

[TokyoBoglehead]

Thank you for all the useful comments. It was very informative. Just to add something that nobody said. It is true that investing on behalf of your kid, as long as your kid is the owner of the account, is seen as a gift or donation and it is taxable. However, there is an annual exemption of 1.1 million yen a year, so every parent can invest up to that amount on behalf of his/her kid without paying any taxes for the gift.

This is a REALLY grey area, that requires caution. There is more talk about it on reddit. The gift tax rule in theory should cover the child, but it is important to show a paper trail [*]Your bank account-> their bank account -> their trading account.

The confusion stems from *abusive* use of the gift-tax rule to avoid inheritance taxes, and arguments about if the child is an independent financial actor, or just "their parents" trading in their name. This confusion caused some people to avoid J-NIsa accounts.

I am no expert obviously, but I think you should be fine if you clearly separate the funds and accounts.

[alberto]

Thank you for your comment. Yes, I think there should be no problem since the account is on my kid's name (with me as custodian), the transferred amounts are below the limit, and it is clear that the funds come from me.

As a separate comment, I cannot see the problem of using the gift tax rule to directly avoid inheritance taxes. Even if the case if obvious with an old person transferring an amount below the limit every year to whoever he wants.

[TokyoBoglehead]

Thank you for your comment. Yes, I think there should be no problem since the account is on my kid's name (with me as custodian), the transferred amounts are below the limit, and it is clear that the funds come from me.

As a separate comment, I cannot see the problem of using the gift tax rule to directly avoid inheritance taxes. Even if the case if obvious with an old person transferring an amount below the limit every year to whoever he wants.

The cases that have been prosecuted relate to grandparents setting up accounts for their grandchildren. The argument made was that the child had no knowledge of said account, and that this was just inheritance tax avoidance. (Which it clearly was).

The government has shown that they are not "keen" on people using the gift tax to avoid inheritance tax, and some laws have been tightened up as a result, and more may be.

[ClearAsMud]

Here's another fun fact about gifts: when someone dies, most gifts to statutory heirs from the preceding three years are included as part of the decedent's estate. The intent is to prevent people from giving away their assets in order to evade inheritance tax. So even ostensibly tax-free gifts to statutory heirs haven't fully become gifts until three years have passed.

(edited to clarify that heirs are involved)

Further edit (taxes are complicated): Technically, it's not just statutory heirs but anyone who inherits part of the estate to whom this rule applies. Grandchildren aren't usually statutory heirs, so the rule wouldn't apply to those who aren't; but if there's a will leaving something to the grandchild -- or if the grandchild is the beneficiary of a life-insurance policy -- then it does. The same thing is true for children-in-law or non-relations.

[RetireJapan]

The solution is clearly to give money away earlier