UGMA accounts are taxable accounts, but they are typically taxed at the minor’s tax rate, which is generally lower than the parent’s tax rate. Typically, the first $1,350 of unearned income each year in the account is treated as tax-free. The next $1,350 in unearned income is taxed at the child’s rate. Anything above $2,700 in annual earnings from the account would be taxed at the parent’s tax rate. So in most cases, there are no taxes paid each year, or taxes will be much less than in a standard investment account. Here is an example:
A UGMA account earns $1,500 in dividends and capital gains from investments. The first $1,350 is tax-free. The remaining $150 would be subject to tax at the child’s tax rate. Assuming the lowest tax bracket (10%), the account would only owe $15 in taxes on the $150 of income.
The same $1,500 of investment income in a regular taxable account (without the benefit of the child’s lower tax rate) would owe $450 in taxes on the entire $1,500 of income (assuming a 30% tax bracket for parents).
In this example, the UGMA account allows for potential tax savings compared to a regular taxable account, as the child's lower tax rate results in a lower tax liability on the investment income.
*Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.