How is investment income from a UGMA account taxed?

Question

If they are 14 or older it is taxed at the child's rate? And if they are younger than 14 they are taxed at the a special rate, partly at the child's rate, partly at the parent's rate?

Thanks so much guys.

Answer 1

The kiddie tax rules changed in 2006. Now children up to 18 (23 if in school) are subject to be taxed at their parent's rate if unearned income is over $1,700.

Additionally, the child may be subject to AMT if he has investment income of over $6,050.

Answer 2

UGMA/UTMA simply refers to the way the account is set up (that is, there is a custodian on the account). The money belongs to the child, so it is taxed to the child.

Originally there was no kiddie tax. Then there was a kiddie tax up through age 13. For 2007 it's up through age 17. For 2008 it can go up to age 23! (The 2008 change is directly due to the LTCG rate going to 0% and parents thinking they could save some taxes by gifting stock to their children.)

For 2007, the kiddie tax works as follows:

the first $850 is not taxed.
the second $850 is taxed at 10%*
the amount over $1700 is taxed at the highest tax rate (the parents or the child's).

(This assumes the child has no other income and the parent attaches a form 8814 to their tax return. If the child has earned income or capital gains they must file their own tax return with form 8615 attached. There is a minor savings if qualified dividends are reported on the child's return rather than the parent's.)