UTMA Account Taxes: A Guide for Parents and Grandparents

Understanding UTMA Accounts

A Uniform Transfer to Minors Act (UTMA) account is a custodial account established for a minor child. The account is managed by a custodian, who is typically a parent or grandparent, until the child reaches the age of majority (usually 18 or 21). UTMA accounts are often used as a way to save for a child's education, medical expenses, or other future needs.

Tax Treatment of UTMA Accounts

UTMA accounts are subject to special tax rules that differ from the tax rules for regular savings accounts. The earnings on a UTMA account are taxed to the child, not the custodian. This is true even if the custodian is the one who deposited the money into the account.

The tax rate on the earnings of a UTMA account depends on the child's income. If the child has no other income, the earnings will be taxed at the child's marginal tax rate. However, if the child has other income, the earnings may be taxed at a higher rate.

Filing Taxes for UTMA Accounts

The custodian of a UTMA account is responsible for filing taxes on the account's earnings. The custodian must file Form 8615, "Tax for Children Under Age 14 Who Have Investment Income of More Than $2,200."

Withholding Taxes on UTMA Accounts

The custodian of a UTMA account may have to withhold taxes on the account's earnings if the child has other income. The withholding rate is based on the child's marginal tax rate.

Planning for UTMA Account Taxes

There are several things that custodians can do to minimize the taxes on UTMA accounts. These include:

• Investing in tax-free investments. The earnings on tax-free investments, such as municipal bonds, are not subject to federal income tax.
• Contributing to the account in a lump sum. This will help to reduce the amount of income that is taxed each year.
• Withdrawing funds from the account before the child reaches the age of majority. This will allow the earnings to be taxed at the child's lower marginal tax rate.

Conclusion

UTMA accounts can be a valuable way to save for a child's future. However, it is important to be aware of the tax rules that apply to these accounts. By following the tips above, custodians can minimize the taxes on UTMA accounts and help the child to reach their financial goals.