Here’s some end-of-the-year advice from new GRS-reader W.C. Varones, a finance professional from San Francisco. Varones writes that if you have investments for your children, now is the time to maximize them.

If you have stocks or mutual funds in investment accounts for your children, don’t let December pass without taking the opportunity to step up the cost basis of the investments.

Every year, a child is allowed $800 of investment income without having to file or pay taxes. This includes interest, dividends, and capital gains. So if you’ve got 100 shares of Disney worth $3200 in Timmy’s account that you bought a few years ago for $2400, Timmy can take the gains without paying taxes (assuming no other investment income). He just needs to sell the stock and then immediately buy it back.

Why do this? Because when Timmy eventually needs the money, he’ll pay taxes only on the gains from the new, higher cost basis — instead of on the gains all the way from the original $2400 to whatever Disney will be worth in ten, twenty, or thirty years. Step up $800 every year, and Timmy’s taxes will be much lower when he eventually cashes out.

The same principle applies to mutual funds. Little Lisa has a no-load fund that has appreciated? Sell enough of it to reap $800 worth of capital gains, and buy it back immediately or switch into a similar fund (or better yet, an index fund or ETF!).

It may even be worth generating more than $800 of gains. Children’s investment income between $800 and $1600 is taxed at the child’s rate, which will typically be very low and almost certainly lower than the parents’ tax rate.

This doesn’t apply to Educational Savings Accounts (ESAs, often called Education IRAs by morons), because they are not taxable accounts.

Even if Timmy doesn’t yet have investments with gains to take, you can take advantage of this step-up. Open an account for Timmy, then transfer some of your own appreciated stock or mutual fund to his account, and sell and re-buy it there.

Thanks for the tip, W.C.! If you have some personal finance advice you’d like to share, drop me a line.

This article is about Investing, Kids, Taxes