Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child’s—usually lower—tax rate, rather than the parent’s rate. For some families, this savings can be significant. Up to $1,050 in earnings tax-free. The next $1,050 is taxable at the child’s tax rate.
- While UGMA/UTMA accounts are the property of the named minor, the custodian is responsible for managing them. These responsibilities include both filing tax returns on behalf of the account owner and ensuring that the taxes are paid.
Does custodian pay taxes on UTMA?
Earnings on custodian UGMA/UTMA accounts are not taxable on a parent’s income tax return, even though the parent may elect to pay these taxes.
Who is obligated for the payment of taxes in an UTMA account?
Amounts deposited in a UTMA above this per-person limit, which is indexed for inflation and subject to change annually, could be taxed at a rate as high as 40 percent. Gift tax is payable by the donor, not the recipient, and requires the filing of a federal gift tax return.
Who pays the taxes on a custodial account?
Any investment income —such as dividends, interest, or earnings—generated by account assets is considered the child’s income and taxed at the child’s tax rate once the child reaches age 18. If the child is younger than 18, the first $1,050 is untaxed and the next $1,050 is taxed at the child’s rate.
Who pays taxes on UTMA capital gains?
Capital Gains Tax Rates Short-term capital gains are taxed at your child’s regular income tax rate for the first $1,000 of taxable income, then at your regular income tax rate. Long-term capital gains, which occur when your child’s custodial account holds an asset for at least one year, benefit from special tax rates.
How are UTMA gains taxed?
Since UTMA accounts are funded with after-tax dollars, withdrawals are not taxed. However, unearned income—such as interest, dividends, and capital gains generated by assets in the account—may be subject to taxation. Currently, the first $1,100 of unearned income is tax-free.
Do I have to file taxes for UTMA?
No, you have no reporting requirement as the custodian. The income from UTMA accounts is the named child’s income and is reported under his/her Social Security number. Your dependent child’s income from investments is taxable income and must be reported if it exceeds the filing threshold.
Are UTMA accounts subject to gift tax?
The annual gift tax exclusion is available for transfers to UGMA/UTMA accounts, even though the child’s enjoyment of the property is delayed. However, UGMA/UTMA transfers will be included in the donor’s gross estate for estate tax purposes if the donor dies while serving as custodian.
What is the capital gain tax for 2020?
Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
What is the 2021 gift tax exclusion?
In 2021, the annual gift tax exemption is $15,000, meaning a person can give up $15,000 to as many people as they want without having to pay any taxes on the gifts. Spouses can each give away $15,000 tax-free each year.
Do I need to report custodial accounts on taxes?
As the adult custodian or a UGMA or UTMA account, you’re responsible for reporting any taxable gains or taxable income. If a child’s custodial account has generated unearned income, you’ve got to report it to the IRS using Form 8615.
Are contributions to UTMA tax deductible?
UGMA/UTMA Contributions Contributions are not tax-deductible, however, you can give up to $15,000 (2021) and $16,000 (2022) per year ($30,000 in 2021 or $32,000 in 2022 for a married filing jointly couple) to an individual without incurring federal gift tax.
What happens to a UTMA account when the custodian dies?
If the custodian of the account dies, a new custodian must be named. The new custodian is appointed under the provisions of the applicable state UTMA or UGMA listed on the account. Typically, under the applicable UTMA/UGMA statute, the custodian may name a successor upon death.
What are the tax advantages of an UTMA?
The main advantage of using an UTMA account is that the money contributed into the account is exempted from paying a gift tax of up to a maximum of $15,000 per year for 2021 ($16,000 for 2022). Any income earned on the contributed funds is taxed at the tax rate of the minor who is being gifted the funds.
What will capital gains tax be in 2021?
Long-term capital gains rates are 0%, 15% or 20%, and married couples filing together fall into the 0% bracket for 2021 with taxable income of $80,800 or less ($40,400 for single investors).