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Author: Actuarystdtjk One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121323  
Subject: UGMA, Taxes, forms, and gifts Date: 7/24/2000 11:51 AM
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Hello to the board, this is a question about UGMA/UTMA. My 2 month old daughter has been given a UGMA/UTMA account in a mutual fund with me as the custodian (I can't remember whether its UGMA or UTMA, are the rules that different between them?). After reading the Tax FAQ and a search of this board, I think I understand the basics of how to handle taxes on this account.

Basically, it sounds like if the account has less than $700 in interest, dividends, and capital gains, then I don't have to file anything extra. Right?

Also, if someday her interest, dividends, and cap gains DO exceed $700, I can tack on Form 8814 to my own return to pay her taxes, because that is the only income she earns. Right?

Ok, now the tricky part- a post from January on this board says that its not the total amount of MONEY in the UGMA account that matters, its the EARNINGS of that money that constitute the income for the child, right?

Well, then what about the 'seed' money that was used to start the account to begin with? Is it just considered a gift to the child, and whenever they turn 18 or 21 they just get it with all the cumulative earnings?

One last question, if I may: In addition to this UGMA account, several other friends have given us Savings bonds in the baby's name. I assume the interest earned on these bonds also contributes to her income, right? So in figuring out how much income she has earned, I add the interest from the savings bonds with the interest, dividends, and cap gains from the mutual fund?

I greatly appreciate all answers- from a new father who feels like he has his hands full already, without any added fuss over the IRS.....

Thank you all in advance - JK
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Author: cleckjr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37927 of 121323
Subject: Re: UGMA, Taxes, forms, and gifts Date: 7/24/2000 12:41 PM
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I'm not sure about the UMTA/UGMA account (I too am trying to figure this one out for myself), but I do know about the US Savings Bonds.

You have two choices:

1) Wait until the savings bond is cashed and then
pay taxes on the income ( e.g. interest) at that
time.

OR

2) Report the interest on the savings bonds EVERY
YEAR until the bond is cashed. Remember, that
once you start reporting the interest yearly
you MUST continue to report the interest.

Remeber you can wait for a long long time, before
choosing to report the interest every year.

When
I was younger (much younger), my father had been
purchasing savings bonds for me. He waited until
I was a teen ager and started to work odd jobs,
before having me claim the interest from the
savings bonds. It works out nice that way, since
you have very very little income when young ...
so you pretty much get the full value of the
savings bond! Just remember to not let the bank
with hold taxes when you cash the bond!


But with a custodial account, claiming the
interest income every year might be a good choice.
But once you start down that path, you've got
to continue to report the interest.



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Author: rkeithhendry Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37930 of 121323
Subject: Re: UGMA, Taxes, forms, and gifts Date: 7/24/2000 2:05 PM
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"Also, if someday her interest, dividends, and cap gains DO exceed $700, I can tack on Form 8814 to my own return to pay her taxes, because that is the only income she earns. Right?"

When the child's TOTAL investment income (including any taxable/reportable interest from the savings bonds) exceeds $700, you can use Form 8814 and pay the tax. But if the child is 14 or older, it is probably more beneficial to file a separate return for the child since the income will be taxed at her rate instead of your tax rate.

About the interest on savings bonds, you don't have to recognize that income until the savings bonds are redeemed.

Keith



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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37933 of 121323
Subject: Re: UGMA, Taxes, forms, and gifts Date: 7/24/2000 2:41 PM
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Basically, it sounds like if the account has less than $700 in interest, dividends, and capital gains, then I don't have to file anything extra. Right?

Right.

Also, if someday her interest, dividends, and cap gains DO exceed $700, I can tack on Form 8814 to my own return to pay her taxes, because that is the only income she earns. Right?

Kinda sorta not really. If her only income is from interest, dividends, and cap gain distributions, you can elect to report her income on your return. If she has Schedule D capital gain/loss transactions, you'll need to file a return for her.

Ok, now the tricky part- a post from January on this board says that its not the total amount of MONEY in the UGMA account that matters, its the EARNINGS of that money that constitute the income for the child, right?

Well, then what about the 'seed' money that was used to start the account to begin with? Is it just considered a gift to the child, and whenever they turn 18 or 21 they just get it with all the cumulative earnings?


The seed money, like all gifts, is not taxable income to the recipient. The only thing that affects income taxes is the earnings.

One last question, if I may: In addition to this UGMA account, several other friends have given us Savings bonds in the baby's name. I assume the interest earned on these bonds also contributes to her income, right? So in figuring out how much income she has earned, I add the interest from the savings bonds with the interest, dividends, and cap gains from the mutual fund?

Yes. As has previously been mentioned, you have a choice of methods for recognizing interest income from savings bonds. There's more information available in chapter 8 of IRS Publication 17.

TMF ExRO
Phil Marti

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