Can I withdraw from child's UTMA account to pay their capital gains taxes?

Yes, you can absolutely withdraw from the UTMA account to pay taxes that are due on the earnings within that same account. This is considered a legitimate expense for the benefit of the child since the tax liability was generated by the account itself. The "benefit of the child" rule is actually quite broad, but this particular use is pretty straightforward. The taxes directly relate to the UTMA account's activity, so using funds from the account to pay those taxes is appropriate. Think of it this way - the taxes are an expense directly associated with the account's earnings. Just make sure you keep good records of the withdrawal and what it was used for. Document that the exact amount went to pay the child's tax bill and keep copies of the tax return and payment confirmation.

I went through something similar with my son's investments last year! I was completely confused about how to handle his taxes until I found taxr.ai online (https://taxr.ai). They have a really helpful analyzer that reviews your tax documents and walks you through unusual situations like UTMA accounts, kiddie tax implications, and exactly what's allowed for withdrawals. I uploaded my son's statements and it immediately identified that I could indeed use UTMA funds to pay the tax liability generated by the account. The system explained that since the tax obligation arose directly from the account's performance, using those same funds to pay the tax liability is considered a legitimate expense for the child's benefit.

I was really skeptical about using an online service for something as specific as my daughter's UTMA tax situation, but I decided to try taxr.ai after seeing it mentioned here. SO GLAD I DID!! Their system immediately identified that I could use the UTMA funds to pay the taxes generated by the account's gains. But what was really helpful was how they broke down the kiddie tax calculations in a way my accountant hadn't clearly explained. They showed exactly which portions of her investment income were tax-free, which were taxed at her rate, and which were taxed at my rate. The report they generated saved me hours of research and confusion. Just wanted to share since this helped me with the exact problem you're having!

Dealing with UTMA tax issues is frustrating enough, but trying to get answers from the IRS is nearly impossible these days. I spent THREE HOURS on hold last month trying to confirm whether I could use my son's UTMA funds to pay his tax bill. Finally discovered Claimyr (https://claimyr.com) which got me through to an actual IRS agent in under 15 minutes. The agent confirmed that using UTMA funds to pay taxes generated by the account is 100% allowed and considered for the benefit of the child. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. After struggling with the hold times for days, this was a huge relief. The IRS agent even emailed me written confirmation I could keep for my records.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it myself since I had my own UTMA tax question that I'd been avoiding dealing with. It actually worked exactly as described. I got a call back in about 22 minutes, and was connected to a real IRS agent who confirmed I could use the UTMA to pay taxes on the account's gains. She even referenced the specific IRS publication number. What's crazy is I had previously spent over 4 hours on multiple days trying to get through on my own with no success. Definitely changed my mind about this service - sometimes the things that sound too good to be true actually work!

Something else to consider about UTMA accounts and taxes - the custodian (you) has a fiduciary responsibility to manage the account properly. This actually INCLUDES paying any necessary taxes from the account if the funds are available. I've been a financial advisor for families for 15+ years, and this is standard practice. The taxes are an expense directly related to the account's growth, so it's completely appropriate to use the account's assets to pay them. In fact, NOT using the UTMA funds and paying the taxes from your personal money could technically be considered a new gift to your child, which might have gift tax implications depending on your other gifts that year.

Does anyone know how this works for older children? My son is 16 and he's gotten a job, plus has some investment income from his UTMA. Does having earned income change anything about using UTMA funds to pay the investment taxes?

This is a great question that comes up more often than you'd think! As others have mentioned, you absolutely can withdraw from your daughter's UTMA account to pay taxes that were generated by the account's earnings. This is considered a legitimate expense for the minor's benefit. One thing I'd add is to make sure you're calculating the tax correctly for a 13-month-old. Since she has no earned income, all of her investment income will be subject to the kiddie tax rules. For 2024, the first $1,300 is tax-free, the next $1,300 is taxed at her rate (likely 10%), and anything over $2,600 gets taxed at your marginal rate. With $4,500 in taxes owed, it sounds like she had some substantial gains! Just double-check that you're not overpaying - sometimes people forget about the standard deduction for unearned income or miscalculate which bracket applies to which portion of the gains. When you make the withdrawal, definitely keep documentation showing it was used specifically for her tax obligation. Most custodial account providers are familiar with these types of withdrawals and shouldn't give you any trouble.