Tax implications of opening CDs in my children's custodial accounts?

Thanks for the detailed explanation! Just to clarify - since they're each earning less than $1,250 in interest, I could either file Form 8814 to include it on my return OR I could just not report it at all since they're under the threshold? Also, does opening a CD change anything about the custodial account status or ownership?

You have two options: either file Form 8814 to include your children's income on your return (which is often simpler), or if each child's interest income is their only income and it's under $1,250, technically they aren't required to file their own returns. However, I generally recommend reporting it one way or the other just to have everything documented properly. Opening a CD doesn't change anything about the custodial account status or ownership at all. The CD will still be held in the custodial account with the same ownership structure - legally your child's money, but under your management until they reach the age of majority (usually 18 or 21, depending on your state's laws). The CD is just a different product within the same account structure.

Does it actually explain the rules clearly? I've tried other tax help sites but they just give generic answers that I could find on Google. I've got a similar situation but with 529 accounts and CDs and I'm confused about which income counts where.

I'm a bit skeptical. How is this different from just reading IRS pub 929? Seems like another service trying to charge for basic info the IRS provides for free. Can it actually handle state-specific rules for custodial accounts? PA treats them differently than some other states.

It definitely explains the rules in plain English, not tax jargon. The difference is it applies the rules specifically to your situation rather than just quoting the general policy. I uploaded my previous year's return and answered a few questions, and it pointed out exactly which forms I needed and why. For state-specific rules, that's actually where it was most helpful for me. It highlighted that my state treats custodial account income differently than the federal government does, which my previous tax preparer had missed completely. It's much more personalized than just reading through IRS publications.

How does this actually work? Does it just call for you or something? And do you still get to talk to the same IRS people you would normally?

Yeah right. The IRS won't even answer their phones most of the time. I've literally tried calling dozens of times about my kid's savings bonds and always get the "call volume too high" message. There's no way this actually works during tax season.

It basically places the call and navigates all the IRS phone tree options, then holds your spot in line. When an agent is about to pick up, it calls your phone and connects you. So you're talking to the exact same IRS agents you would reach normally, just without the hours of waiting on hold. It worked perfectly during tax season for me. That's actually when I needed it most - I tried calling myself 5 times in April and kept getting the "call volume too high" message. With Claimyr I got through on the first try within about 20 minutes. The system texts you updates about your position in the queue so you can go about your day until an agent is ready.

I hadn't thought about that! I'll double-check with the bank to make sure the SSNs are correctly attached to the new CDs. Did you have to file any special forms to correct the error with the IRS?

I had to contact the bank first to get them to issue corrected 1099-INT forms with the right SSNs. Then I had to file a Form 1040X (amended return) to remove that interest income from my return. The bank should verify the SSNs when you open the CDs, but definitely double-check because they messed up even though I provided the correct numbers initially. The most annoying part was that the IRS sent me a notice saying I had "underreported income" when I didn't include the interest on my return the following year (after the bank had fixed it in their system but before the IRS had processed my amended return). It took several more calls and letters to get it all straightened out.

I've done both. The advantage of I Bonds is you can defer the tax reporting until the bonds are cashed in or mature. With CDs, you'll get a 1099-INT every year even if you roll over the CD. But setting up Treasury Direct accounts for minors is more complicated than just opening a CD at your existing bank. You need to print forms, get them signed, mail them in... it's a lot more paperwork.