Finance Questions

Archive for the ‘Kiddie Tax’ Category

When opening an UGMA account, people often don't think about taking money from their UGMA account. But, after a few years, the most popular questions concerning UGMA accounts concern borrowing money from UGMA and how are UGMA account withdrawals taxed.

At some point in time, taking money from your UGMA account may be necessary. If you have multiple UGMA accounts, you will need to decide which UGMA account you are taking withdrawals from.

How are UGMA Account Withdrawals Taxed?

All UGMA account withdrawals are taxed. Depending on the age of the minor whose name and social security number is listed on the UGMA account, different tax rates for the UGMA account withdrawals apply. When withdrawals are taken from an UGMA account, the minor must file an annual income tax return.

The minor's social security number is on the UGMA account for him or her. The minor must pay taxes on any income exceeding a certain tax limit that year produced by the UGMA account withdrawals at the parent's top marginal tax rate until the minor reached the age of 14. UGMA account withdrawals taxation exclusions are available and they are indexed for inflation.

Taking money from my UGMA

If you are taking money from your UGMA account and you are 14 or above, then you must pay income taxes to the IRS on your UGMA account withdrawals at you tax rate. You are the UGMA account beneficiary and you are responsible for paying taxes. In most states, the custodian of the UGMA account is responsible to ensure that taxes are paid. So, when borrowing money from your UGMA account, think about how UGMA account withdrawals are taxed.

UGMA stands for Uniform Gift for Minors.

UTMA stands for Uniform Transfers to Minors.

What are the tax consequences of setting up a custodial account?

The assets of an UGMA / UTMA account are the minor's property outright. Any gifts made to an UGMA / UTMA account are irrevocable and the donor relinquishes all rights to the property.
Although a designated custodian manages the property while the minor is under the applicable age of majority, legal title to the assets belongs to the minor. As soon as the minor reaches the designated distribution age, at which the UGMA or UTMA specifies that custodianship terminate, the assets in the custodial account must be distributed or transferred to an account in the single name of the minor.
There is no limit on the maximum contribution that may be made to a custodial account. To the extent a donor contributes more than $11,000 ($22,000 for a married couple, each giving $11,000) to a custodial account in any one year the donor is required to file a gift tax return even if no gift tax is due.
Since the child is the owner of the assets in the custodial account, all the income tax consequences belong to the child. How the income generated in the custodial account will be taxed and reported to the IRS depends upon the age of the child and the child's other sources of income.