UGMA account generates taxes
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?
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.