USA custodial saving account (UGMA) tax

[omidmech0]

I opened a custodial saving account (UGMA) for my 9 years old daughter. I have two questions:

1- Can I file taxes under the minor name?

2- Can the tax owed on income generated within a custodial account be paid from the same account? or simply the account pay for itself, so i don't need to report it under my annual tax return.

Thanks for the help.

 

[BIG E]

The income from the custodial account should be registered in the minor's name with the minor's Social Security Number.
IF the minor is otherwise required to file a return due to income thresholds or otherwise, then the income from the
account gets reported on the minor's tax return.
It doesn't get reported on your return unless (and I highly doubt that it's applicable in this situation) the minor has excess
investment income (around $ 2,000) to require filing the Kiddie Tax and wish to report the income on your tax return and not file
a return for the minor.

 

[omidmech0]

The income from the custodial account should be registered in the minor's name with the minor's Social Security Number.
IF the minor is otherwise required to file a return due to income thresholds or otherwise, then the income from the
account gets reported on the minor's tax return.
It doesn't get reported on your return unless (and I highly doubt that it's applicable in this situation) the minor has excess
investment income (around $ 2,000) to require filing the Kiddie Tax and wish to report the income on your tax return and not file
a return for the minor.

Thank you for providing such valuable information.

Yes, the child's SSN is associated with the account, and I am serving as the custodian until she turns 18. The initial contribution to the account is $100k, and it's invested in the stock market. With an assumed average interest rate of 10%, the account generates an annual income of approximately $10k, which exceeds the Kiddie tax limit.

My goal is for this account to sustain itself and cover its own tax liability, so I won't need to use personal funds. Even with the taxes paid from the account, the net result remains positive, and I anticipate its growth over the next 10 years.

1. Considering these factors, do you still believe it's possible for me to utilize the generated income from the account to cover its annual tax?
2. If this approach is feasible, would it be better to report the income under my own return or file a separate individual return under my daughter's name?

I sincerely appreciate your insights on this matter.

Thank you,

 

[BIG E]

That depends on what your tax rate is. Only your tax professional can answer that.
Yes - there is a way for you to personally on your tax return to pay for her liability
for that income (I believe it's Form 8814). But including her
income on your tax return to save her Kiddie Tax could cost you more because it
brings up your total income and might put your return into a higher tax bracket
as well as other possible factors that cost you more tax money.
If you want her to pay the tax then all you need to do is contact the stock broker
and request that the account distribute a specific amount. But you should make
it clear that it should come from liquid cash that's in the account, and not sell
securities to come up with the cash -because that will give rise to a capital gain
income transaction, increasing her taxable income even further.

 

[BIG E]

You have not mentioned something that is equally important.
If you gifted $ 100K in one year, then you and possibly your husband
need to consider filing a Form 709 - Gift Tax Return - to report the total
gift given to her (possibly filing 2 separate Gift Tax Returns for split gifts).
Once you gift anyone more than $ 17,000 in any tax year, you are responsible
for filing a gift tax return (during the regular filing season). There is no money
paid, it's simply a reporting form to report that you've used up the excess of $ 17,000
of your lifetime gift and estate tax exclusion. This indirectly protects her in case IRS
reviews her financial records and asks "How did your daughter accumulate so much
assets in one transaction"?