How will my minor child's investment income from CDs affect our taxes and credits?

The good news is you're handling this situation thoughtfully! Let me address your concerns: For tax purposes, interest from the CDs should be reported under your stepchild's Social Security number since it's their money. The bank will likely issue a 1099-INT in their name if you set it up properly. If your name is just on there as a custodian (which is common for minors), you shouldn't be taxed on that interest. Make sure the account is properly designated as a custodial account. Regarding dependency status, Social Security survivor benefits are generally not counted toward the support test for dependency purposes. The IRS specifically excludes these benefits when determining if a child provides more than half of their own support. The CD interest is income to the child but is likely minimal and also wouldn't count toward the support test unless it's actually spent on the child's support. For the FAFSA question, custodial accounts for other children (like your stepchild) are not typically counted as assets for the parent when a different child applies for financial aid. However, FAFSA rules do change periodically, so you might want to check with a financial aid counselor as you get closer to that time.

After dealing with a similar situation with my niece who moved in with us, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out all the confusing dependency and income reporting issues. When my niece started getting survivor benefits, I had no idea how to handle it for taxes. The bank kept putting the interest income on my taxes even though it was clearly her money! Taxr.ai analyzed our situation and explained exactly how to set up the accounts properly and what forms to file. They even provided a detailed explanation of how survivor benefits impact dependency tests that I could show my accountant. What I especially liked is that you can upload your tax documents and they'll analyze everything to make sure you're getting all the credits you're entitled to. For blended families like ours with unusual income situations, it was a huge relief.

I was really unsure about trying an AI tax tool like taxr.ai after seeing it mentioned here, but I had a similar situation with my grandson's survivor benefits and those confusing custodial accounts. What surprised me is that it actually found a mistake in how our bank was reporting the interest income - they were using my SSN instead of my grandson's which could have caused problems down the line. With the guidance from taxr.ai, I was able to get the bank to correct the reporting before tax time. The tool also confirmed what I was hoping - that his survivor benefits wouldn't count toward the support test for claiming him as a dependent. Ended up saving us about $2,000 in tax credits we would have otherwise missed. Definitely worth checking out if you're dealing with dependent children who have their own income sources.

I've been in a similar situation with my brother's kids who receive survivor benefits. Trying to reach the IRS for clarification was IMPOSSIBLE. I spent 3 weeks calling every day, sitting on hold for hours, only to be disconnected. Then someone told me about Claimyr (https://claimyr.com) and showed me this demo: https://youtu.be/_kiP6q8DX5c. Basically they call the IRS for you and when they get someone on the line, they connect you. Thought it sounded like a scam but I was desperate. I used it to get through to the IRS about these exact questions - how survivor benefits affect dependency status and how to properly report custodial account interest. Got connected to an IRS agent in about 45 minutes (instead of days of trying). The agent walked me through the proper way to report the interest income and confirmed that survivor benefits don't count toward the support test. Honestly saved me so much stress and potentially an audit.

I need to follow up about my experience with Claimyr. I was super skeptical (as you could see in my previous comment), but I was getting absolutely nowhere with the IRS on my own. I decided to try it as a last resort because I needed official clarification about my nephew's survivor benefits and how they affect his dependency status before filing my taxes. Honestly, I was shocked when they actually got through. After 3 weeks of failed attempts on my own, I was connected to an IRS representative in about an hour. The IRS agent confirmed what others mentioned here - that survivor benefits are not counted for the support test, and they helped me understand exactly how to report the CD interest properly. They even sent me the specific IRS publications that address these issues. I'm still not thrilled I had to pay to talk to a government agency I should be able to reach on my own, but it saved me potentially thousands in incorrect tax filing. Sometimes you have to admit when you're wrong, and I was definitely wrong about this service.

One thing nobody's mentioned yet is the Kiddie Tax. If your stepchild's investment income (like the CD interest) exceeds a certain threshold ($2,300 for 2023), it could potentially be taxed at YOUR tax rate rather than the child's lower rate. But with CDs and current interest rates, you'd need a pretty substantial amount invested to hit that threshold. For example, even with a 5% CD, you'd need over $46,000 invested to generate $2,300 in interest. Also worth noting that Social Security benefits themselves generally aren't subject to the Kiddie Tax - it's specifically for unearned investment income like interest, dividends, and capital gains.

Just went through this last year with my grandkids. Make SURE the bank sets up the account with the child's SSN as the primary tax ID number!!! My bank messed this up and reported all the interest under my SSN even though the account was supposed to be a custodial account. Had to file an amended return and it was a huge hassle. When you open the CDs, specifically ask who will receive the 1099-INT and verify it will be issued to the child's SSN.

This is such a thoughtful way to handle your stepchild's survivor benefits! I went through something similar when my sister passed and I became guardian of her two kids. A few practical tips from my experience: When you open the CDs, bring your stepchild's Social Security card and specifically tell the bank representative that this is a custodial account funded with the child's survivor benefits. Ask them to read back to you exactly whose SSN will be the primary tax ID on the account - this saved me from the reporting headache others mentioned. Also, keep detailed records of where the money comes from (survivor benefits) and what it's used for. I created a simple spreadsheet tracking the monthly survivor benefit deposits and any transfers to CDs or other investments. This documentation was really helpful when I had questions about dependency status and support calculations. One thing that surprised me was that some banks have special "Representative Payee" account types specifically for people managing Social Security benefits for others. These accounts are designed to keep the beneficiary's funds separate and ensure proper tax reporting. You might want to ask if your bank offers this option. The dependency and tax credit questions you're asking are exactly the right ones - it shows you're being really careful about doing this properly!

I'm dealing with a very similar situation with my stepson's survivor benefits, so this thread has been incredibly helpful! One thing I learned from our tax preparer that might be useful - even though Social Security survivor benefits don't count toward the support test for dependency, you should still keep records of how much you're actually spending on your stepchild's care (food, housing, medical, etc.) versus the amount of their survivor benefits. The IRS can sometimes look at the total picture if there are questions, and showing that you're providing the majority of their actual support (even though the benefits don't count against dependency) can strengthen your position for claiming them as a dependent. Also, regarding the FAFSA question - I found out that if the custodial account is properly set up with the child as the beneficiary, it typically won't count as a parent asset for OTHER children's FAFSA applications. However, when your stepchild eventually applies for FAFSA themselves, those CD accounts will count as their asset, which could potentially affect their aid eligibility. Something to keep in mind for long-term planning. The Representative Payee account option mentioned by Anastasia sounds like exactly what you need to keep everything properly separated and documented!