Kiddie Tax Loophole Dead – UGMA & UTMA Now a Poor Choice for College Savings

kiddie taxBy David John Marotta and Beth Anderson Nedelisky

Income-shifting is one of several tax planning tools families have used to lower their tax bill. Historically, parents could save a bundle by transferring highly appreciated investments to their children who are in lower tax brackets. However, this year, Congress has made income-shifting a dream of the past, trapping more kids in the dreaded “kiddie tax.” Beginning January 1, 2008, children under 24 will owe taxes on unearned income at their parents’ higher tax rates.

The “kiddie tax,” or so it has been affectionately named, is a tax on children’s unearned investment income or capital gains. Instead of tax


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4 Responses to Kiddie Tax Loophole Dead – UGMA & UTMA Now a Poor Choice for College Savings

  1. Paul says:

    Why can’t a child with a large portfolio provide more than half of his own support and disqualify the parent from claiming him and then take his personal exemption on his own return and avoid the kiddie tax?

  2. NickP says:

    At Fidelity, a UTMA can be transferred to a 529 plan.

    If used for higher education, none of the transfer would be taxable.

    Is my understanding correct?

  3. H.A. says:

    NickP – your understanding is correct. Many 529s will allow transfer of a UTMA in, however, at that point, unlike a standard 529, your 529 will be labelled a 529/UTMA. This indicates that the 529 is not the property of the account owner (parent), but the benficiary.

    Standard 529s are the property of the account owner. The beneficiary can be changed or the money withdrawn by the account owner to do as they please. Not the case when it gets labelled 529/UTMA.

    Before doing the transfer to a 529, be very sure that it is meeting your objectives. If you had saved in the UTMA specifically for college, then the 529 transfer may be appropriate.

  4. Matt says:

    Please take some time to sign this online petition to revise kiddie tax.

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