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What Parents Should Know About Taxes On Custodial Accounts

What Parents Should Know About Taxes On Custodial Accounts
If your child turns 21 and is still a full-time student, the account can still get hit with taxes.

My daughter is about to turn 21 and will be able to control the custodial account we established for her years ago. Will she qualify for the 0% capital-gains rate if she sells shares after she has control of the account? She is in college, and my wife and I claim her as a dependent. —J.D., New Hartford, N.Y.

Even though your daughter can control the account at 21, she’ll still be subject to the kiddie tax if she’s a full-time student younger than age 24 and doesn’t provide more than half of her own support with income from a job. With the kiddie tax, her unearned income (such as dividends, interest and capital gains) over $2,100 will be taxed at the parents’ rate. For the first $2,100, your daughter would probably pay 0% long-term capital-gains tax. Only taxpayers in the lowest two brackets qualify for the 0% rate.

Your daughter should wait until she is 24 or supporting herself to sell most of the stock, recommends John Dundon, an enrolled agent in Englewood, Colo. At that point, the gains will be taxed at her own (likely lower) rate.

Have a question? Contact John Dundon, EA, Taxpayer Advocacy Services, Colorado

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