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Income Tax Consequences
Because a custodial transfer is considered a completed gift, income
generated by custodial property is generally
taxable to the minor. However, the income will be taxed to you to the
extent that the custodian uses the income
to satisfy your legal support obligations. See Rev. Rul. 59-357, 1959-2
CB 212. Unearned income over $1,300 is
taxed to the child (the first $650 is not taxed and the next $650 is
taxed at 15%), under the "kiddie tax"
provisions, at the parent's tax brackets as long as the child is under
age 14. Thereafter, the income is taxed
directly to the child.
For example, a gift transfer to a child under age 14 of $10,000 which
earns 6.5% annually will not be taxed. A
transfer of $20,000 earning 6.5% annually ($1,300 in income) will
produce just a $97.65 tax (15% of $650) to
the child. If the same income were taxed to a parent in the 31% tax
bracket, the
tax would be $403.
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