Junior NISA and tax calculation when selling at age 18

[tmj]

I've been looking into the Junior NISA for our little ones, and I'm trying to figure out if it's worth it vs. investing via some other methods in our situation. I've read through a few of the older threads on this topic in this forum, but want to see if anyone has new insights or updated information.

Our situation is the kids are dual Japan/US citizen, with me a renounced US citizen now holding only Japanese citizenship.

As I want to avoid PFICs for the kids' accounts, one of the first things I noticed in the older threads is that I should stay away from any mutual funds or even US-stock based ETFs (since they seem to be more like a Japanese fund "wrapper" around a US based ETF). But single stocks should be OK, right?

If a main goal for the investment is to help fund their college education, they would sell part of this at age 18-20. But how is tax on gains from that sale calculated? With the Junior NISA going away after 2023, the account gets rolled-over into a 継続管理勘定 account at that point, which lots of sites mention that it holding value (保有) is not taxed. But if you were to sell when you are first able to at age 18, would your gains be taxed on the gain from the value of the account all the way back to when it got rolled-over, or are all gains up to that point (and ultimately up to age 20) not taxed?

If it's the former, it doesn't seem like much of a savings over normal trading accounts, but if it's the latter it sounds like a potentially huge tax benefit and something I should really take advantage of. Most Japanese sites I've looked at all simply mention the 保有 being 非課税 and say nothing specific about what happens when you do sell. But this one site seems to indicate it may be the latter: https://okanenokozuchi.com/junior-nisa-rollover

Anyone have more clarity on this subject?

[RetireJapan]

My understanding (and I am not very confident of this) is that Junior NISA years are tax-free for five years, after which time the investments are moved into a 'locked' taxable account. Capital gains tax would be due when you sell based on the price after the five-year tax-free period.

This is one reason I am not such a fan of Junior NISA: it seems overly restrictive for a limited gain. Generally I recommend people max out their own NISA accounts and iDeCo accounts before paying into Junior NISA.

Does anyone have a better understanding?

[TokyoWart]

I and my kids are US citizens and I established regular brokerage accounts and then Junior NISA accounts for them. Just a few comments for you to consider:

As I want to avoid PFICs for the kids' accounts, one of the first things I noticed in the older threads is that I should stay away from any mutual funds or even US-stock based ETFs (since they seem to be more like a Japanese fund "wrapper" around a US based ETF). But single stocks should be OK, right?

Yes, single stocks are okay and that is what we have used. That does give you a little more volatility risk because it's more difficult to fully diversify with individual stocks.

If a main goal for the investment is to help fund their college education, they would sell part of this at age 18-20. But how is tax on gains from that sale calculated? With the Junior NISA going away after 2023, the account gets rolled-over into a 継続管理勘定 account at that point, which lots of sites mention that it holding value (保有) is not taxed. But if you were to sell when you are first able to at age 18, would your gains be taxed on the gain from the value of the account all the way back to when it got rolled-over, or are all gains up to that point (and ultimately up to age 20) not taxed?

What I have been told is that we will be taxed on gains only after the Junior NISA period (i.e. my understand is similar to RetireJapan's). However, if you "break" the account by, for instance, moving everyone back to the US before the kids are 18 and sell at that time you will be taxed on all gains and retrospectively taxed on any dividends you received tax-free up to that point. You can effectively avoid that by selling starting when the child turns 18 since there is no penalty at that point.

If it's the former, it doesn't seem like much of a savings over normal trading accounts, but if it's the latter it sounds like a potentially huge tax benefit and something I should really take advantage of.

I would not call this tax benefit "huge" unless you really have a stellar performer among your stock picks. I think my kids are getting at most on the order of 80,000 yen/year in dividends which means they've saved around 16,000 yen in the last year (after maxxing out the accounts every year since they started). In addition we might have around 350,000 yen in net unrealized capital gains.

One other consideration. If your US citizen child has an account that exceeds $10,000 in value, you need to file an FBAR (FinCEN form 114) for them. It's filed in their name using their Social Security number. That's easy to do online and my understanding enforcement is really concentrated on large accounts but it will be one thing you have to do if you set up Junior NISA accounts while you don't need to do it if you just save in your own name through a NISA, etc.

[tmj]

Thanks for the responses!

What I have been told is that we will be taxed on gains only after the Junior NISA period (i.e. my understand is similar to RetireJapan's). However, if you "break" the account by, for instance, moving everyone back to the US before the kids are 18 a

yep, and my main concern is what is considered the Junior NISA period in this regard. Is it the 1st few years of the "true" Junior NISA, or does it include the period up to age 18 or 20 where the assets are "locked" into the account. Actually I did a little more digging and noticed something interesting on this site: https://www.fsa.go.jp/policy/nisa2/abou ... index.html

If you look at footnote 3 on the "20歳になる前にジュニアNISA制度が終了してしまう場合" chart, regarding the rollover into a taxable account at age 20 it says "払い出し時の時価が、新たな取得価格となります", i.e. the acquisition price gets reset to the price at rollover, which would be great, assuming that there is no unsaid "it gets reset after you pay capital gains tax on the stock back up to when the 5 year Junior NISA period ended..". (and also noting that since we're limited to single stocks, all depends on the performance of stock picks over 15+ years).

So one more question regarding how this all works if you are buying individual stocks. Going by the info and chart they have under Q8 here: http://www.jsda.or.jp/nisa/jr/qa/, it looks like you buy up to 80man of stock per year, and each year's "slot" gets held tax-free for 5 years. After 5 years the tax-free period ends so you can either move that money into a taxable account (again, with no tax paid on capital gains as the acquisition price resets).

Or you could keep the money in the Junior NISA and use it for that year's slot, but only maximum 80man is allowed. But seeing as anyone starting now would hit the first 5 year period-end after the program ends in 2023, all gains from those 5 years are able to roll-over into the non-taxed continuing management account.

Does my understanding sound correct? If so, this doesn't sound like too bad of a scheme, I may just go for it, after checking the long-term performance of some Japanese stocks.

One other consideration. If your US citizen child has an account that exceeds $10,000 in value, you need to file an FBAR (FinCEN form 114) for them. It's filed in their name using their Social Security number.

Yes, as you say FBAR is online and easy, so not that painful. I used to do it for myself up until a few years ago. What will be more painful is having to file tax returns for them to report capital gains, although the amounts they would make should be well under the threshold that they would have to pay anything. What is the threshold for having to pay capital gains tax anyway? It's different than the standard deduction, right?

[TokyoWart]

What will be more painful is having to file tax returns for them to report capital gains, although the amounts they would make should be well under the threshold that they would have to pay anything. What is the threshold for having to pay capital gains tax anyway? It's different than the standard deduction, right?

The rules for kids' taxes are in publication 929 (which still uses an old threshold of $2100):

https://www.irs.gov/publications/p929#e ... 1000203812

and this is also explained in this link which uses the updated threshold of $2200:

https://www.irs.gov/taxtopics/tc553

My basic understanding is until they have $2200 in unearned income (i.e. dividends, interest or capital gains) they have no tax liability in the US. None of my kids have gotten that high in unearned income but I file individual returns for them and they've never had any federal tax liability. Above $2200 in unearned income dependent children are taxed at the rate applicable to trusts and estates.

[tmj]

My basic understanding is until they have $2200 in unearned income (i.e. dividends, interest or capital gains) they have no tax liability in the US.

In my case, since they are not dependents I would be reporting on a tax return for myself, it looks like as single filers the threshold may be $1500 for reporting on dividends. But then I am not sure if it's necessary to file anyway if dividend income would be less than the $12,200 gross income threshold shown in Chart A here; https://www.irs.gov/instructions/i1040gi

But either way, this sounds like there may be some benefit, even this late into the game. Buy up to 80man of stock over the next 3 years, let it all roll over into the continuing management account until age 20, at which the acquisition price resets and they could sell w/o major tax needing to be paid (Japan), or they could move it into a taxable brokerage account or standard NISA (if one exists in some form at that time).

On the US tax side, possibly report & pay tax to the US on dividends (not quite sure what the thresholds are for single filers yet), and, if they maintain US citizenship when they sell the stock at age 20, pay capital gains tax (which again might not be much or anything seeing how high the thresholds are for long-term capital gains tax brackets).

Now it's just a matter of finding ordinary stocks that look stable and positive over 10+ years