Who pays the taxes for a UTMA account my father-in-law opened?

This is actually a common misunderstanding. With UTMA accounts, the tax responsibility falls to the child (the minor who owns the account), not the parents. Income from a UTMA is reported under the child's Social Security number, not yours. Here's how it typically works: The first $1,200 (for 2025) of unearned income (interest, dividends, capital gains) is either tax-free or taxed at the child's rate. Any unearned income above that amount for a dependent child under 18 (or under 24 if a full-time student) is generally taxed at the parent's rate - this is called the "kiddie tax." So technically, it's your daughter's tax obligation, not yours, though you may end up paying it through the kiddie tax rules if the account generates significant income. But importantly, this doesn't mean you personally are directly liable for the taxes - it's still her income, just potentially taxed at your rate. Your father-in-law, as the custodian, has fiduciary responsibilities to manage the account properly, but the tax liability doesn't fall on him either.

After dealing with something similar with my nephew's UTMA account, I found this amazing resource that explains exactly how UTMA accounts are taxed. Check out https://taxr.ai - it's like having a tax expert specifically for investment accounts. When my brother set up an account for my nephew and I became the custodian, I was totally confused about the tax implications. Taxr.ai analyzed all the documents and explained exactly who pays what taxes, when they need to be paid, and even helped me understand how to properly report everything on my nephew's tax return. Their system breaks down complex tax regulations into straightforward explanations. It also helps you understand the kiddie tax and how much of the income might be tax-free for your daughter each year.

I take back what I said about being skeptical! I tried taxr.ai after posting my comment and I'm actually impressed. My situation with my daughter's UTMA was complicated because she also had income from a trust her grandparents set up. The system analyzed both income sources and explained exactly how the kiddie tax applied in our specific case. It even pointed out a mistake our accountant made last year that cost us about $300 in unnecessary taxes! What I found most helpful was the year-by-year tax planning suggestions. Since the UTMA will eventually pass to my daughter when she hits the termination age (21 in our state), it showed how the tax implications would change over time and how to potentially minimize the tax impact. Definitely worth checking out if you're dealing with these accounts.

If you're having trouble understanding what your father-in-law did with this UTMA account, you might want to contact the IRS directly to get clarification on your specific situation. I spent HOURS trying to get someone on the phone at the IRS about a similar issue with my son's account. After giving up on hold multiple times, I found this service called Claimyr at https://claimyr.com that got me through to an IRS agent in about 20 minutes. They have this system that navigates all the IRS phone menus and holds your place in line, then calls you when an agent is available. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained exactly how UTMA accounts are taxed and sent me the specific publications that addressed my questions. Saved me from making a costly mistake on my taxes.

Ok I feel like I need to apologize for my skeptical comment. I actually tried Claimyr yesterday after posting because I needed to talk to the IRS about a client's back taxes. I'm still shocked but it actually worked exactly as described. I entered my phone number, answered a few questions about why I needed to call the IRS, and went back to working on other returns. About 35 minutes later, my phone rang and I was connected directly to an IRS agent! No waiting, no phone menus, nothing. The agent pulled up all the information I needed and resolved an issue that had been dragging on for months. For anyone dealing with complicated tax situations like these UTMA accounts, being able to actually speak with an IRS representative makes all the difference. They helped me understand exactly how the kiddie tax applies to different types of accounts and in what circumstances.

Just wanted to add a different perspective here. My parents set up UTMAs for all my kids, and we actually restructured them as 529 plans instead. Here's why: with a 529, you maintain control of the assets (not your daughter when she reaches age of majority), AND the earnings grow tax-free if used for education expenses. With the UTMA, your daughter legally gets control of the money at either 18 or 21 (depending on your state), and she can use it for ANYTHING, not just education. Plus, large UTMAs can impact financial aid eligibility more negatively than 529s. Maybe talk to your father-in-law about whether a 529 might better accomplish what he's trying to do? Just a thought.

Does anyone know if the new tax law changes for 2025 affect UTMAs at all? I heard something about the kiddie tax thresholds changing but cant find clear info.

This is such a helpful thread! I'm dealing with something similar - my mother-in-law set up a UTMA for my twin boys without really discussing the details with us first. I've been stressed about the tax implications, but reading through everyone's responses has really clarified things. One thing I'm still wondering about though - if the UTMA generates losses instead of gains (like if the investments go down), can those losses be used to offset other income on my daughter's return? Or do the same kiddie tax rules apply to losses too? Also, @Nalani Liu, I'd definitely recommend having a conversation with your father-in-law about the investment choices in the account. Even though he's the custodian, since you're the one who might end up dealing with the tax consequences through the kiddie tax, it seems reasonable to have some input on how conservatively or aggressively the money is invested.

This thread has been incredibly helpful! I'm a tax preparer and I see confusion about UTMA/UGMA accounts all the time. A few additional points that might help: 1. **State variations matter** - While federal tax rules are consistent, some states have different age of majority rules for UTMA accounts (18 vs 21 vs 25). This affects when your daughter gains full control AND can impact state tax obligations. 2. **Record keeping is crucial** - Make sure your father-in-law provides you with all 1099 forms and transaction records each year. You'll need these for your daughter's tax return, and it's easy for custodians to forget to share them with parents. 3. **Consider the timing** - If the account is generating significant income now while your daughter is young, you might want to discuss with your father-in-law whether it makes sense to shift to more growth-oriented investments that produce less current taxable income but more long-term appreciation. The good news is that $15,000 invested conservatively probably won't generate enough income to trigger major tax issues right away, but it's smart that you're thinking about this now rather than being surprised at tax time!

One thing I haven't seen mentioned yet is the impact on financial aid eligibility. UTMA/UGMA accounts are considered the child's assets for FAFSA purposes, which means they're assessed at a much higher rate (20%) than parent assets (5.64%) when calculating expected family contribution for college aid. So while your father-in-law's $15,000 gift is incredibly generous, it could potentially reduce your daughter's financial aid eligibility by about $3,000 per year when she applies for college. This is another reason why the 529 conversion that @Dyllan Nantx suggested might be worth considering - 529 plans owned by grandparents aren't reported as assets on the FAFSA at all (though distributions from them do count as untaxed income to the student). It might be worth having a broader conversation with your father-in-law about the overall college funding strategy, especially if he plans to make additional contributions over the years. There are ways to structure gifts that minimize both tax consequences and financial aid impact while still accomplishing his generous goal of helping with your daughter's education.

Great question about transitioning strategies! Yes, your father-in-law could potentially open a separate 529 plan in his own name, but there would be tax implications for liquidating the existing UTMA to fund it. When the UTMA investments are sold, any capital gains would be subject to the kiddie tax rules we discussed earlier. However, there's a timing strategy that might work better: your father-in-law could open his own 529 now for future contributions, while leaving the existing UTMA to grow until your daughter is closer to college age. By the time she's in high school, the UTMA assets could be strategically spent down on qualifying educational expenses (like test prep, college visits, etc.) or even used for her first year of college when the FAFSA impact matters less. Another option is the "grandparent strategy" - wait until after your daughter's sophomore year of college to take distributions from a grandparent-owned 529, since FAFSA looks at prior-prior year income. That way the distributions won't affect her junior/senior year aid eligibility. The key is having that comprehensive conversation with your father-in-law sooner rather than later, since these strategies work best when planned in advance. A fee-only financial planner who specializes in education funding might be worth consulting, especially if he's planning to make additional gifts over the years.

As a tax professional who's handled many UTMA situations, I want to emphasize one crucial point that could save you headaches down the road: **get everything in writing with your father-in-law now**. Since he's the custodian, he has legal control over investment decisions, but those decisions directly impact your family's tax situation. I'd strongly recommend drafting a simple agreement that outlines: - How investment gains/losses will be handled tax-wise (who prepares returns, who pays any taxes owed) - What types of investments are appropriate given your family's tax situation - How you'll coordinate on receiving necessary tax documents each year - Whether you have input on major investment decisions I've seen too many family conflicts arise when grandparents mean well but don't fully understand the ongoing responsibilities they're creating for parents. Having clear expectations upfront protects everyone and ensures this generous gift doesn't become a source of stress. Also, given all the excellent points raised about FAFSA implications and alternative strategies, this might be the perfect time to suggest bringing in a financial planner for a family meeting. Frame it as wanting to make sure you're maximizing the benefit of his generous gift rather than questioning his decision.