My daughter got an Ameritrade account titled Her Name AS CUST FOR Son's Name UTMA CA UNTIL AGE 18
Son is 2 1/2 years old. Account is under son's SS #
Her account, invested in stocks, has realized about $4000 in ST Cap Gains in 2021.
Her accountant says
Put son's stuff on mother's tax return because she is the custodian and if you do a separate return for the child they ask for the parent's income anyhow and tax it that way,
Is this correct and is it the best way to file?
Mel
The accountant is mostly right, but left out an option. If the unearned income is more than $1100, if a separate return is filed for the child, I think the first $1100 is not taxed. The balance would be taxed at the parents' tax bracket. This rule only applies to unearned income.
It's not correct at all. The accountant is totally wrong. You cannot report a child's capital gains on the parent's return. They have to file a separate return for the child.
You can include a child's investment income on the parent's return if the child's only income is interest and dividends, including capital gain *distributions* (in 1099-DIV box 2a). But if the child has actual capital gains (on a 1099-B), not just capital gain distributions, it cannot go on the parent's return.
Including a child's interest and dividends on the parent's return has nothing to do with who the custodian is. It doesn't matter whether the custodian is the child's parent or someone else. It's a choice of including a child's income on the parent's return or filing a separate return for the child.
IRS Publication 929 has a long list of reasons that reporting the child's income on the parent's return could result in paying more tax. See "Effect of Making the Election" on page 11. That includes a number of deductions and credits that could be reduced or eliminated because the child's income increases the parent's AGI. The only advantage of reporting the income on the parent's return, if it can be done at all, is that it's a little less paperwork.
Bob Sandler
I agree with what Bob said.
Re: what Stu said "If the unearned income is more than $1100, if a separate return is filed for the child, I think the first $1100 is not taxed. The balance would be taxed at the parents' tax bracket. This rule only applies to unearned income. " - It's almost correct. Assuming this 2.5yo's income is all from investments: On child's own tax return, the first $1,100 of income will be tax-free, the 2nd $1,100 of income will be taxed at child's own rate (10%?), and the remainder will be taxed at the parents' marginal tax rate.
Maria U. Ku, CPA Oakland, CA
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