Who pays the taxes for a UTMA account my kid's grandparent set up?

The tax situation with UTMA accounts is actually pretty straightforward, though many people misunderstand it. The earnings in a UTMA account are taxable to the minor (your daughter), not to you as the parent. Since the UTMA assets legally belong to your daughter, she's responsible for the taxes, even though she's your dependent. For practical purposes, this means you'll likely file what's called a "kiddie tax" return for your daughter if the investment income exceeds a certain threshold (currently $1,150). The first $1,150 of unearned income is generally tax-free, then the next $1,150 is taxed at the child's rate (which is usually 10%). Anything above $2,300 gets taxed at the parent's tax rate. The custodian (your father-in-law in this case) isn't responsible for the taxes despite being the one who manages the account until your daughter reaches the age of majority.

Just sharing my experience because I went through this exact situation last year. I wasted hours researching before finding https://taxr.ai which saved me so much time understanding my daughter's UTMA account taxes. My in-laws had set up an account years ago that I forgot about until I received tax forms. The tool analyzed all the documentation for me and explained exactly who owed what taxes and why. The platform helped me understand that while my daughter technically owed the taxes as the account beneficiary, I needed to report it correctly as her parent. It also showed me how to handle the "kiddie tax" rules that apply to unearned income for minors.

I actually tried https://taxr.ai after seeing the recommendation here, and I'm honestly impressed. I've been struggling with my daughter's UTMA account taxes for two years now. My tax preparer kept filing it wrong and I got a letter from the IRS last year. The service helped me identify that the capital gains distributions were being improperly reported on my personal return instead of being handled through the kiddie tax rules. It actually showed me exactly which line items were incorrect on my previous returns and explained how to file an amendment. Saved me from another potential IRS notice and probably a few hundred dollars in incorrectly calculated taxes.

If you're having trouble getting a straight answer from the IRS about UTMA accounts, I highly recommend using https://claimyr.com. I spent weeks trying to call the IRS to get clarification on my grandson's UTMA account after receiving conflicting information from my accountant and the financial institution. After multiple failed attempts (waiting on hold for hours only to get disconnected), I tried Claimyr and got through to an IRS agent in about 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent confirmed that the income should be reported on the child's tax return, not the custodian's or parent's return (though parents are responsible for filing on the child's behalf). They also explained how the kiddie tax works with UTMA accounts and sent me the specific publications I needed to properly document everything.

I hate to admit when I'm wrong, but I have to say Claimyr actually worked. After my skeptical comment, I decided to try it anyway because I was desperate to get clarification on how to handle my son's UTMA account that's now generating significant dividends. Got a call back in about 35 minutes and spoke with an IRS agent who was surprisingly helpful. They confirmed that since the UTMA is legally my son's property (despite me being the custodian after my dad passed away), the income is taxable to him. They also explained that I don't need to file a separate return if his unearned income is under the threshold, which saved me from unnecessarily filing an extra tax return this year.

My accountant had a different take on this that might be helpful. She told me that while the UTMA account legally belongs to the child, WHO files and pays depends on the amount: 1. If the investment income is less than $1,150: No tax return needed for the child 2. Between $1,150-$2,300: Child files return and pays taxes at child's rate (usually 10%) 3. Over $2,300: Child files return but pays at PARENT'S rate on the amount over $2,300 So technically the child owes the taxes, but practically speaking, if the amount is substantial, you as the parent will feel the impact since it's taxed at your higher rate. And realistically, parents usually pay these taxes from their own money since the child's money is locked in the UTMA.

This is slightly off-topic but important - make sure your father-in-law did not name HIMSELF as the custodian of the UTMA. If the person who funds the account also serves as custodian, and that person dies before the minor takes control, the entire account value could be included in the donor's estate for tax purposes. This doesn't affect the income tax situation you're asking about, but it's a common mistake with UTMAs. If possible, you or your spouse should be named as custodian instead. This is something my family learned the hard way after my dad set up UTMAs for my kids.

Something nobody mentioned yet - depending on how much money is in the UTMA, it could impact financial aid eligibility for college! UTMA assets are considered the child's assets, and student assets are assessed at a much higher rate (20%) than parent assets (around 5.6%) when calculating the Expected Family Contribution for FAFSA. With college costs these days, this could actually end up being a much bigger financial hit than any tax consequences if your daughter plans to apply for financial aid. Just something to keep in mind for future planning.

This is such a helpful thread! I'm dealing with a similar situation where my mother-in-law set up a UTMA for my son without consulting us first. Reading through all these responses has been really educational. One thing I want to add based on my research - if your father-in-law is making ongoing contributions to the UTMA, make sure he's aware of the annual gift tax exclusion limits. For 2024, he can contribute up to $18,000 per year without having to file a gift tax return. If he's married, his spouse can also contribute up to $18,000, making it $36,000 total per year from grandparents. Also, regarding the tax responsibility discussion - I learned that even though the child technically owes the taxes, as the parent you're still responsible for ensuring the return gets filed correctly and on time. The IRS will come after you if there are problems with your minor child's tax return, so it's definitely worth understanding these rules even if the tax burden isn't huge right now. Thanks everyone for sharing your experiences and the useful resources!

Great question! I went through this exact situation with my daughter's UTMA account last year. To clarify what others have mentioned - the taxes are indeed the child's responsibility, not yours as the parent or your father-in-law as the custodian. However, there's a practical aspect that's worth mentioning: while your daughter technically owes the taxes, you'll be the one filing her tax return and likely paying the taxes from your own funds since she's a minor. The good news is that with a $5,000 initial deposit, unless there are significant gains or dividends, you may not even need to file a return for her this year. I'd recommend asking your father-in-law what types of investments he chose for the account - if they're growth stocks with minimal dividends, the tax impact could be very small initially. If he invested in dividend-heavy stocks or funds, that's when you'd see more immediate tax consequences. One more thing to consider: have a conversation with your father-in-law about future contributions and investment strategy. Since you'll be dealing with the tax implications, it makes sense to have some input on how the account is managed, even if you weren't involved in setting it up initially.

This is such a comprehensive discussion! As someone who's been through this exact situation, I wanted to add one practical tip that saved me a lot of headache. When tax season comes around, make sure you get organized early. The financial institution will send tax forms (usually 1099-INT for interest and 1099-DIV for dividends) to your daughter's Social Security Number, not yours. I almost missed these forms the first year because I wasn't expecting mail addressed to my minor child! I'd also suggest creating a simple spreadsheet or file to track the account activity throughout the year. Note any dividends, interest payments, or transactions - this makes tax prep much easier and helps you estimate whether you'll need to file a return for your daughter. One last thing - if the account grows significantly over the years, consider consulting with a tax professional who understands kiddie tax rules. The rules can get complex, especially if there are capital gains involved, and it's worth getting expert guidance to make sure everything is filed correctly. The peace of mind is worth the cost, especially since any mistakes on your child's return ultimately become your responsibility to fix.

This thread has been incredibly helpful! I'm dealing with a very similar situation where my mother set up a UTMA for my 8-year-old son. What I found most valuable from this discussion is understanding that while the child technically owes the taxes, as parents we're still responsible for filing correctly and dealing with any IRS issues that arise. One thing I want to emphasize for anyone new to this - don't let family dynamics prevent you from having important conversations about these accounts. I was initially hesitant to ask my mother detailed questions about the investments and account management because I didn't want to seem ungrateful. But after reading about the financial aid implications and tax responsibilities, I realized I needed to be more involved. I ended up having a really productive conversation with her about the investment strategy and we agreed to focus on growth investments rather than dividend-paying stocks to minimize current tax implications. She also added me to receive copies of all statements so I can track things throughout the year. For anyone else in this situation - approach it from the angle of wanting to be a responsible parent who ensures proper tax compliance and long-term planning for your child's benefit. Most grandparents and relatives will appreciate that perspective and be willing to collaborate.

This has been such an informative thread! I'm dealing with a similar situation where my father-in-law set up a UTMA for my 4-year-old without much discussion beforehand. Reading through everyone's experiences has really helped me understand the tax implications and given me confidence to have those important conversations. One thing I want to add that I learned from my accountant - if you're in a state with its own income tax, make sure you understand how UTMA income is treated at the state level too. Some states follow the federal kiddie tax rules, but others have their own thresholds and requirements. In my state, we actually needed to file a state return for my child even though the federal requirements didn't kick in yet. Also, for anyone worried about the financial aid impact that was mentioned earlier - I spoke with a financial aid counselor who suggested that if the UTMA balance becomes substantial (like over $10,000-15,000), it might be worth consulting with a financial planner about strategies to minimize the impact on aid eligibility. There are legitimate ways to spend down UTMA funds for the child's benefit in the years leading up to college applications. Thanks to everyone who shared their experiences and resources - this is exactly the kind of practical advice that makes navigating these family financial situations so much easier!

This has been such a valuable discussion! As someone who just discovered a UTMA account that my mother-in-law set up for my 5-year-old twins without telling us, I'm grateful for all the insights shared here. One practical tip I learned from my tax preparer that hasn't been mentioned yet - if you have multiple children with UTMA accounts, make sure you're tracking them separately for tax purposes. Each child gets their own $1,150 threshold and their own potential tax return. I initially thought I could somehow combine their investment income, but that's not how it works. Also, regarding the gift tax limits mentioned earlier - it's worth noting that if grandparents are funding multiple UTMA accounts for several grandchildren, they need to stay under the annual exclusion limit for EACH child. So if your father-in-law has multiple grandkids, he needs to make sure he's not exceeding $18,000 per child across all the accounts he's funding. The resources mentioned like taxr.ai and Claimyr sound really helpful - I'm definitely going to check those out before next tax season. Having the right tools and information makes such a difference when you're trying to handle these complex family financial situations responsibly.

As someone who recently went through this exact situation with my daughter's UTMA account, I can confirm what others have said - the taxes are technically your daughter's responsibility, not yours or your father-in-law's. However, practically speaking, you'll be the one handling the filing and likely paying any taxes owed. One thing I'd suggest is having a conversation with your father-in-law about getting copies of all account statements and tax documents sent to you as well. Since you'll be responsible for filing your daughter's tax return if needed, you'll want visibility into the account activity throughout the year. Most financial institutions can easily add you to receive duplicate statements. Also, don't stress too much about the current situation. With a $5,000 initial deposit, unless the investments are generating significant dividends or interest, you may not even need to file a return for your daughter this year. The first $1,150 of unearned income is generally tax-free, and investment growth that isn't realized (like stock appreciation that hasn't been sold) doesn't create a current tax obligation. I'd recommend using this as an opportunity to get more involved in understanding how the account is invested and managed, since you'll be dealing with any tax implications going forward. Most family members are happy to collaborate once they understand you're trying to be responsible about the tax and financial planning aspects.

I'm in a very similar situation where my grandmother recently set up a UTMA for my 7-year-old daughter without discussing it with us first. Reading through this thread has been incredibly helpful in understanding the tax implications! What I found most reassuring is learning that with the initial deposit amounts we're talking about ($5,000 in your case), the immediate tax impact is likely to be minimal. The $1,150 threshold for unearned income gives us some breathing room, especially if the investments are focused on growth rather than high-dividend stocks. I ended up having a productive conversation with my grandmother after reading the advice here about approaching it from a "responsible tax compliance" angle rather than seeming ungrateful. She was actually relieved that I wanted to be involved in understanding the account since she wasn't entirely sure about the tax implications either. One thing I learned that might help you - I asked to be added to receive all account statements and tax documents, and the financial institution made it really easy to set that up. Now I can track the account activity throughout the year and won't be surprised by any tax forms that come addressed to my daughter's SSN. The key insight for me was realizing that while this is a generous gift, it does create ongoing responsibilities for us as parents, and it's completely reasonable to want visibility and input into how it's managed. Most family members understand that once you explain the practical implications.