Benefit of gifting money to kids and investing it

[catfoodfire]

Hi folks,
Long term lurker first time poster.
I did search the forum before posting, so apologies if this has been covered before, but I couldn't find any conclusive answers.

I'm fortunate to be in a position where I can maximize the 1.1M annual tax free gift for my two kids and I'm looking for how to make the best use of that. What I'm trying to find conclusive answers to is
1. From what I could gather from a few sources, dividends can either be taxed at 20.315% (which is what I'm doing myself now), OR be sourced as general income. For someone who's working and earning a salary, the former is obviously better, but for a kid w/o any salary income, the latter would be better. Does anyone know if my understanding is correct, and if so do you just declare the income in different parts of your tax return, or is there anything else you need to do?
2. To minors also get some default income tax deductions? (This would be relevant depending on the answer to (1) above)
3. My broker (IBRK) doesn't offer accounts for anyone under 18. For anyone who has set up investment accounts for their kids, what broker do you use?

[captainspoke]

(bump)

[beanhead]

I'm fortunate to be in a position where I can maximize the 1.1M annual tax free gift for my two kids and I'm looking for how to make the best use of that. What I'm trying to find conclusive answers to is
1. From what I could gather from a few sources, dividends can either be taxed at 20.315% (which is what I'm doing myself now), OR be sourced as general income. For someone who's working and earning a salary, the former is obviously better, but for a kid w/o any salary income, the latter would be better. Does anyone know if my understanding is correct, and if so do you just declare the income in different parts of your tax return, or is there anything else you need to do?
2. To minors also get some default income tax deductions? (This would be relevant depending on the answer to (1) above)
3. My broker (IBRK) doesn't offer accounts for anyone under 18. For anyone who has set up investment accounts for their kids, what broker do you use?

Welcome to the forum. Good post, and a tricky one as well...

Regarding question 3, when we opened junior NISA accounts with Rakuten, one of the parents had to open the account for the child. The child account is connected to a parent account. So one of the adults needs to also have an account with Rakuten and manage it until they are 18.
I just checked and, even with junior NISA not available any more, Rakuten seems to use the same structure. So it is possible to set up an account and invest in tokutei or general accounts.
https://www.rakuten-sec.co.jp/web/under_age/

For 1 and 2, I don't have experience, I am afraid. For the child to get a tax deduction they would have to be filing their own tax return, I assume. Typically this is not done, of course, but there must be a way to file for a minor. Those somewhat annoying child 'talents' on TV are generating income, so there must be the option of filing even as a minor.
Maybe @tkydon, our tax guru, has some insight?

[Tkydon]

Hi folks,
Long term lurker first time poster.
I did search the forum before posting, so apologies if this has been covered before, but I couldn't find any conclusive answers.

I'm fortunate to be in a position where I can maximize the 1.1M annual tax free gift for my two kids and I'm looking for how to make the best use of that. What I'm trying to find conclusive answers to is
1. From what I could gather from a few sources, dividends can either be taxed at 20.315% (which is what I'm doing myself now), OR be sourced as general income. For someone who's working and earning a salary, the former is obviously better, but for a kid w/o any salary income, the latter would be better. Does anyone know if my understanding is correct, and if so do you just declare the income in different parts of your tax return, or is there anything else you need to do?

Yes. For Foreign Dividends:
If the person's total Taxable Income is less than about Y30M (the cutoff will vary based on actual circumstances), then it would be better to file the dividends as Aggregate Income and pay the Marginal Rate of Income Tax (5% or 10% National, 0.105% or 0.21% Reconstruction, and 5% or 10% Residents' Taxes (dependeng on how they are filed)).
If the person's total Taxable Income is more than about Y30M (the cutoff will vary based on actual circumstances), then it would be better to file the dividends as Separate Taxation Method Income and pay the Dividend Tax at 20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes).

For Japanese Dividends:
There is the Credit for Dividends, which offsets the rising Marginal Tax Rates so that the cutoff will move up to around Y60M Total Taxable Income before it would be beneficial to switch to the Separate Taxation Method and pay the Dividend Tax.

You should do, or get a professional to do the calculations for you.

Japanese Brokerages will withhold the taxes at the Separate Taxation Method level, as they don't know your other tax status, so in order to receive a refund, you / they would have to file a return - Kakutei Shinkoku.
You will also have to see if it is possible to keep the Residents' Taxes at the withheld 5% instead of jumping up to 10% (This came up a couple of weeks ago with the change to the Return Form for 2023 - I don't know the answer yet), but this only moves the cutoff a little...

2. To minors also get some default income tax deductions? (This would be relevant depending on the answer to (1) above)

If they earn more than a certain amount, they can no longer be counted as your Dependent, so you lose the Y380,000 Dependent Allowance you would receive for them, and they would have to file their own tax return, but then they would get their Tax Allowance of Y480,000 tax free.

[catfoodfire]

Thanks for the responses!
I haven't heard a lot of good things about Rakuten, but if they can do it then at least it answers the question about whether it can be done or not, so thanks!

For switching my dividend taxation to aggregate income, I'd do that after I retire (since I make more than 60M annually now), and post retirement I'd make less than 30M in aggregate income. IBRK does indeed withhold tax as separate taxation, so I'll have to figure out how to file for that return in the kakutei shinkoku when it comes to that (and/or for my kids if I start investing in dividend-paying stocks for them).

"If they earn more than a certain amount, they can no longer be counted as your Dependent"
Do you happen to know what that amount is? This income only counts "actual" income correct, not unrealized capital gains?
Ideally I'd keep their income low enough to not lose my own dependant allowance, but also let them maximize their own 48万 tax allowance.

[catfoodfire]

Trying to answer my own question in case anyone else is interested.
According to https://www.pmac.shigaku.go.jp/en/about ... 06_01.html and https://www.monkakyosai.or.jp/en/shikumi/04.html the answer seems to be 1.3MJPY/year.

Assuming that's the case, if you'd invest in a normal VOO/VTI/VTSAX with a dividend payout of ~1.5%, they'd need to have 85MJPY+ invested before they'd lose their eligibility to be counted as your dependents (assuming no other income), which if you gift them the full 1.1MJPY/year and calculate with a historical (nominal) ~9%CAGR, would take them to the age of about 23 to hit, by which time they probably won't be your dependants anymore anyway. That's also assuming the allowable income isn't adjusted upward due to inflation in the coming 23 years.

All in all it seems like this'd be a beneficial thing to do, just have to set it up, and learn how to submit a tax return for the kiddos.
Will write more in the thread once/if I make more progress.

[RetireJapan]

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Interesting topic, will be looking into it as part of an inheritance tax article

[catfoodfire]

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Well, 大トロ can be catfood too

Interesting topic, will be looking into it as part of an inheritance tax article

Sounds interesting! Inheritance tax is indeed the big boogeyman I'm trying to avoid.
That, along with instilling an understanding of the power of compounding in my kids at a (relatively) early age, e.g. letting them chose between reinvesting the dividends and spending it (which they are legally allowed to, since it's frighteningly enough their assets).