We all want the best for our children and grandchildren. And sometimes that means giving them more than words of encouragement.
If you're thinking about giving a monetary gift to your children or grandchildren - perhaps as an investment toward their college education or first home purchase - you should be aware that gifts to custodial accounts are considered complete. They can't be taken back and you may want to familiarize yourself with the tax rules regarding gifting. Once a gift is made to a minor, many people are unsure of the tax implications on a child's income-producing property, such as stocks, bonds and mutual funds.
When should I file a tax return?
Who is responsible for filing the return and paying any taxes due?
At what rate and how much of the income will be taxed?
How will this affect eligibility for college financial aid?
The answers to these questions depend an the age of the child, his or her full- or part-time employment status and whether he or she can be claimed as a dependent on someone else's return. In general, the child will not receive a personal exemption, and any unearned income (dividends, interest, capital gains, etc.) in excess of $1,400 will be taxed to the child at the parent's rate.
You don't have to file an income tax return for any child who has total taxable income of less than $700 for the year.
For minors, the parents or legal guardians are responsible for a child's tax return and ensuring that taxes are paid. If the parent chooses to pay the tax using his money and not the child's, this amount is considered an additional gift.
Eligibility for financial aid depends on the size of the student's nest egg and the college's requirements.
For example, taxation of a child under the age 14
If a child has $1,500 or more of dividend income from a mutual fund and no other income, then the tax rules are as follows.
The first $700 would be tax-free (standard deduction).
The second $700 would be taxed at the child's rate (15 percent).
The remaining $100 (excess over $1,400 limit) would be taxed at the parent's rate, which is usually in the 28 percent tax bracket or higher.
Consult your tax professional for more information.
A brighter future
If you're thinking about gifting money to your children or grandchildren, your investment representative can help you set up an investment plan designed to grow as they do.
Aileen A. Low is an investment representative with Edward Jones of Mountain View. For more information, call 567-9811.