Estate Planning Blog

New Higher Tax on UTMA Accounts – Beware the “Kiddie Tax”

If you’re not familiar with an UGMA or UTMA account, they are accounts that make it simple to transfer property to your children. The Kiddie Tax applies to the net unearned income of a child, regardless of the source of the property that generates the income. Unearned income is income that is not attributable to earned income, which generally includes wages, salaries, professional fees, and other amounts received for personal services rendered. The child must be under the age of 19 or a full-time student under the age of 24. Additionally, the unearned income of the child must be over $2,100, Bloomberg BNA.

Are You Asking Yourself “How will the revamped Kiddie Tax rules hurt my child’s unearned income (savings)?”

  • Learning the New Law

In 2017 a newly implemented Tax Cuts and Jobs Act drastically changed the way children get taxed on their unearned income. As of 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. Forbes points out that the kiddie tax changes can actually hit families of modest means–where the parents’ tax bracket is lower –the hardest. These tax rates can be as high as 37% for ordinary income or, for long-term capital gains and qualified dividends, as high as 20%, according to Concannon Miller. These new rules prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets.

  • Changing the Way you Gift Money

Although these new rules have been implemented, there’s still ways of minimizing your tax rates. According to Forbes, you should – Name children or older, already launched grandkids as the beneficiaries of your traditional pre tax IRAs–the kind whose distributions are taxable. Young grandkids can still be beneficiaries of Roth IRAs–the ones funded with after tax dollars, whose distributions aren’t taxable. Don’t have any Roths? The new lower individual income tax brackets give retirees more room for low-tax-cost Roth conversions. If your main goal is paying for your grandkids’ education, fund 529 college savings plans now.

  • Helping Your Children

In addition, you can still gift modest amounts of low-basis stock to UTMA accounts (custodial accounts for kids ). On the first $14,800 in qualified dividends and long-term gains, the kids will owe just $1,515, an effective 10% rate. For 2018, a parent can take advantage of the annual federal gift tax exclusion to move up to $15,000 into a custodial account for each of his or her children (up from $14,000 in 2017). If the parent is married, so can the spouse. Parents can do the same thing year after year. Gifts up to the $15,000 annual limit will not reduce the parent’s unified federal gift and estate tax exemption. A minor child’s custodial account must be established under the applicable state Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), Cantrell & Cantrell.

Are You Ready To Assure Your Child/Grandchild Receives the Most Out of Their Inheritance?

Inheriting money is always a great way to help your loved one, but making sure they receive the most out of that inheritance is sometimes tricky. At  The Law Offices of Joel A Harris, we offer the best guidance for minimizing the tax rate applied towards your loved one’s inheritance, catered to your individual needs. Throughout the process, we explain everything and patiently answer every question you may have. Since 1993, The Law Offices of Joel A Harris has worked tirelessly to assure individuals create the most beneficial inheritance towards their child/grandchild. We want the best for your children too! Feel free to reach out to us at (925)757-4605.


Request a Consultation

This field is for validation purposes and should be left unchanged.