According to 2007 federal income tax laws, dependent children under 18 can earn up to $850 of interest or dividend income and owe zero income taxes. From $850 to $1700, the child's investment earnings are taxed at 10%. Above $1700, the child's investment earnings are taxed at the parents rate.
For 2007, our daughter received interest from our UTMA (Uniform Transfer to Minors Act) account and dividends from her grandparent's UTMA account. The total of the earnings was less than $850 and thus, she owed no income tax. In addition, since her earnings are below the amount for one exemption, she does not need to pay state taxes either.
Any investment earnings by our daughter's UTMA accounts will be tax free until $850 is reached. If the funds had been saved in our (the parent's) or her grandparent's accounts, the earnings would have been taxed at the parent's or the grandparent's tax rates. While the tax on $850 may not seem very large, using a UTMA account reduces our overall family taxes by $200 to $250 versus the case having the $850 in our (the parent's) income. For me, $200 saved in income taxes is $200 earned :-)
For more on Crossing Generations , check back every Thursday for a new segment.
This is not financial advice. Please consult a professional advisor.
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