I am considering a custodial account for an infant. It will be set up at Smith Barney. I am told I will receive a 1099 annually. I assume I will have to file a tax return as custodian for the baby. I'm interested in how complicated this will be as I am already doing my own taxes which are fairly complex. Could anyone give me an idea of the info that would be involved in filing such a return? I am guessing it would be fairly simple, but I want to check before I get involved. Thanks very much for your help!. Frank
The kidde tax gives the baby a $850 tax free amount, and $850 taxed at his rate. An oversimplification, but this means it's a simple return until the net gain (div + int + any cap gains) exceed $1700. Depending how you invest, it may mean paying higher tax next year, or never. Even over the $1700, it's not that bad. It's the 1041 trust returns that are a pain, doesn't apply to you. JOE
Until the baby has more than $850 of investment income (assume he has no other income), you don't even have to file a return (except for years where there's an actual sale of securities).
If the child is the owner of the funds, the account should be in the child's name and the 1099 should be sent to the child.
The parents or guardian of the child are responsible for seeing that the child's income tax return is filed. If you are neither then your responsibility is to provide the parents/guardian with the information needed for the child's tax return.
It would be as simple a return as any other for which the only income is dividends, interest and capital gains. The instructions for Form 1040 likely provide all the guidance you need.
As with most questions on this group the real answer is that "it depends". The major factors that affect it are the particular types of investments in the account and the total amount of taxable income. If you do a lot of trading in the account, it could get complicated to fill out the Schedule D. On the other hand, if the account is mostly buy-and-hold with stocks and mutual funds, then the main potential for complication is the so-called "kiddie tax". If a dependent child's income exceeds the threshold (this year it's $1700 for unearned income alone), then the excess is taxed at the parent's marginal rate. Although fairly simple conceptually, the form for computing this is stultifyingly complicated. If you have more than one child, then things get even worse, because all of the tax returns start interacting with each other. Software from the major vendors handles a lot of this, but so far as I know, there isn't anything (at least not TurboTax or TaxCut) that will let you link all of the children's forms with the parent's and transfer the necessary information automatically. That means that you can't effectively compute the child's tax until the parent's return is finalized. At that point you need to partially do each child's form until you have enough information to transfer to all of their siblings. Then you can complete each child's return. Another drawback is that if anything changes on any one of the returns, then all of the children's returns need to be recalculated.
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