UTMA Capital Gains Taxes for a Newborn Baby - Filing Requirements?

You'll need to file a separate tax return for your daughter using Form 1040. Since the capital gains exceed the $2,500 threshold for "kiddie tax" rules, a portion will be taxed at your rate using Form 8615. Here's how it breaks down: The first $1,250 of unearned income is tax-free. The next $1,250 (so that's the portion between $1,250-$2,500) is taxed at your daughter's rate, which is likely 10%. Then anything over $2,500 (so in your case, about $7,000) will be taxed at your rate using the "kiddie tax" rules. You'll need to get your daughter a Social Security number if she doesn't already have one. The tax return should be filed in her name but signed by you as the parent/custodian. Make sure to check the box indicating that she's a dependent on someone else's return.

I was dealing with a similar situation last year with my nephew's UTMA and found taxr.ai (https://taxr.ai) super helpful for figuring out these unusual tax situations. I was confused about exactly how to report everything, especially with the kiddie tax calculations, and their AI was able to analyze the 1099-B and walk me through the exact forms I needed. Basically it reviewed my documents and gave me step-by-step instructions for filling out Form 8615 (which is the "kiddie tax" form) and explained how everything connects to the main 1040. Saved me from making some expensive mistakes.

Just wanted to follow up and say I tried taxr.ai after my first hesitation. It was actually really helpful! I uploaded my daughter's 1099-B (with account numbers blurred out) and it broke down exactly how the kiddie tax applies and which forms to use. The thing I found most useful was that it explained how to properly report the basis information from the 1099-B on Form 8949 before transferring totals to Schedule D. I would have definitely messed that up. It even pointed out that I could exclude the first $1,250 of my daughter's unearned income from taxation completely, which I wasn't clear on before. Much easier than trying to piece together info from random tax websites!

If you've been trying to call the IRS to ask about this UTMA situation, good luck! I spent 3 hours on hold last week trying to get clarification about my son's UTMA and kiddie tax rules. Eventually gave up and tried https://claimyr.com - there's a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. They basically got me a callback from the IRS in about 20 minutes instead of waiting on hold forever. The IRS agent I talked to confirmed everything about the separate return requirement and walked me through how Form 8615 works with the UTMA capital gains.

I'll admit I was wrong and I'm now hatless! After seeing the previous recommendation, I tried Claimyr yesterday because I had almost identical UTMA questions about my grandson's account. Got a call back from an actual IRS agent in about 15 minutes. The agent confirmed everything the first commenter said about filing requirements. She also pointed out something important - since my grandson's UTMA is going to have ongoing capital gains each year (smaller amounts, but still), she recommended I look into filing Form 8814 in future years which lets parents elect to include children's income on their own return if it's under certain limits. Doesn't help with the current situation but good to know for next year.

I'll admit I was wrong and I'm now hatless! After seeing the previous recommendation, I tried Claimyr yesterday because I had almost identical UTMA questions about my grandson's account. Got a call back from an actual IRS agent in about 15 minutes. The agent confirmed everything the first commenter said about filing requirements. She also pointed out something important - since my grandson's UTMA is going to have ongoing capital gains each year (smaller amounts, but still), she recommended I look into filing Form 8814 in future years which lets parents elect to include children's income on their own return if it's under certain limits. Doesn't help with the current situation

One thing nobody's mentioned - check if your state has its own kiddie tax rules! I went through this whole process correctly on federal only to discover my state has different thresholds and requirements. Had to amend everything.

Not to complicate things more, but remember you only need to file a separate return for your child if their income exceeds the standard deduction for dependents. For 2023 that's $1,250 for unearned income.

Just want to add something important that I learned the hard way - make sure you keep detailed records of the original gift transaction and the automatic sale/reinvestment that triggered the capital gains. The IRS may want to see documentation showing that this wasn't a deliberate sale by you as the custodian. Also, since the brokerage automatically sold and reinvested without your instruction, you might want to check if they have any liability for the unexpected tax consequences. Some brokerages have been known to help cover tax impacts when their automatic processes create unintended taxable events, especially in custodial accounts for minors. One more thing - if you're going to have ongoing similar situations with gifts to the UTMA, consider asking family members to gift cash instead of appreciated securities to avoid future kiddie tax complications. Much easier to manage!