-advertisement -

George Saenz, the Bankrate.com Tax Talk columnist UGMA account generates taxes

Dear Tax Talk,
My ex-husband's parents gave my kids some mutual funds and stock investments over the years. Don't they have to pay the tax on the income from these accounts?
-- Jane

Dear Jane,
Their benevolence is your responsibility come tax time.

Gifts to children are usually made under the Uniform Gift to Minors Act, or UGMA. The income from an UGMA is usually reported to the IRS under the child's Social Security number. Generally, the child is responsible for filing his or her own tax return and for paying any tax, penalties or interest on that return. If the child cannot file his or her own return for any reason, such as age, the child's parent or guardian is responsible for filing a return on his or her behalf.

The IRS does not define what a child's age should be before he or she is required to file a return. Since kids are trouble enough, the least you can do is be sure that they don't have a run-in with the IRS. If your children are younger than 18 at the end of the year, their investment income in excess of $1,700 in 2006 is taxed at your marginal tax rate. Previously this applied to children younger than 14.

If their investment income is in excess of this threshold, you'll need to have your taxes completed so that their taxes can be computed. At this point, it doesn't matter what the grandparents report as income, since it has become your responsibility. The amount of taxes attributable to the child's income can be paid out of the UGMA. Alternatively, if you feel that they should hang on to their money, you can pay it.

Bankrate.com's corrections policy -- Updated: Nov. 9, 2007
Read more Tax Adviser columnsAsk a question
UGMA or UTMA in a 529 plan
Kiddie tax tightened
Best strategies: paying for college
June 15 filing deadline for some
Find the tax professional who's right for you
Coming up with tax cash

Compare Rates
30 yr fixed mtg 4.45%
48 month new car loan 3.77%
1 yr CD 0.89%
Rates may include points
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
- advertisement -