Parent as custodian set up UGMA account for kid years ago. Kid is approaching 18 with an expected gain of approx. 9,000.

Parent is contemplating withdrawing the funds before child becomes 18, or let fund sit and child pays whatever tax on gain.

My question is how the gain would be taxed, interest, capital gain or dividend, and what would be more beneficial, kid after 18, with no income pays the tax or let the parent close the account and pays the tax.



Your input is much appreciated

Deo

Parent is contemplating withdrawing the funds before child becomes 18, or let fund sit and child pays whatever tax on gain.=======>>>>>>>>>>>>> When the account was created, you appropriately placed the child's SSN# on the account. One of the important misconceptions about these accounts is that they guarantee that you will not pay income tax on a certain amount of dividends, interest, and gains. The reality is, custodial accounts don’t actually grant this privilege, but simply take advantage of it. Every child under 19 years old or 24 if a full-time student, who files as part of their parents’ tax return, is allowed a certain amount of “unearned income” at a reduced tax rate. Currently, the first $950 is considered tax-free, and the next $950 is taxed at the child’s bracket (10% for Federal income tax). Anything above those amounts is taxed at the parents’ rate, which may be as high as 35%.The annual income from the accounts is taxable to the kid and not to you as the creator or custodian. Because the assets are considered the property of the minor, these accounts are often used to take advantage of the “kiddie tax.” The kiddie tax allows a certain amount of a minor’s income to go untaxed, and an equal amount to be taxed at the child’s tax rate as opposed to mom and dad’s rate.There are no IRS penalties on taking money out of a UGMA account. However, it is possible that the investments purchased may have a surrender charge or exit fee if held less than a certain amount of time.


My question is how the gain would be taxed, interest, capital gain or dividend, and what would be more beneficial, kid after 18, with no income pays the tax or let the parent close the account and pays the tax.============>>>>>>>>>It depends; your kid may be subject to tax on distributions from the UGMA account to the extent the withdrawals represent capital gains on the investments held in the account.These gains may be taxed as low as 0% UNLESS the kid’s tax bracket is higher than 15%.The gain is computed by starting with your original investment and adding additional amounts invested by both contribution and dividend reinvestment.the kid may be subject to tax on income earned on the account in the form of interest or dividends.If this is the kid’s only source of income, all, or part of it will be free from tax and the remainder will be taxed at 0% rate. The money in the UGMA account, once given, is the legal property of the kid. Any profits made on the liquidation of investments in the kid’s UGMA account are reported on the child’s tax return. Some or all of this might be included on your tax return, at your tax rate, depending on how you file your tax returns. For tax and other reasons, parents want to transfer ownership of cash and other financial assets to children who are too young to handle such assets. One way to do this is to establish a trust. The Uniform Gifts to Minors Act provides an alternative that may be simpler, cheaper and faster than a trust.

Whether she is subject to her state income tax, please contact the Dept of Rev of your state; the rules are pretty much the same from state to state.
Note;due to a minor's limited authority under the law to contract or be sued, the gift act simplifies the transfer of assets to children without the need to establish a trus, one drawback is that the child receives the account balance at the time they reach majority age, either 18 or 21.You that created the account may be considered the custodian but has no legal say in how she uses the funds.