Question of the Week

A man opened a Uniform Transfers to Minors Account for his grandson several years ago. The grandson is now 13 years old, and this year the mutual funds in the account produced earnings of $6,000. The taxes due on the account are based on whose tax bracket?

a) The grandfather’s, because he opened the account
b) The child’s tax bracket because this is a minor’s account
c) The parents’ top marginal bracket
d) There is no tax on the earnings because this is a tax-deferred account

Answer:

The correct answer is c.

Income in UGMA/UTMA accounts is always taxable, the question is at whose bracket. The general rule is that unearned income (growth) to a minor child exceeding $1,500 in a year is taxed to the child at the parents’ top marginal tax bracket. The grandfather’s tax bracket is irrelevant to the taxes owed by the child.