23 Feb Does my kid need to file a tax return?

 Q. My one-year-old has some mutual fund investments that were given as gifts. They are in UGMA accounts. At what point does my child have to file a tax return?

A. It’s terrific that your one-year-old already has some investments.

If those funds stay in UGMA accounts, eventually, you will probably have to file a tax return for your child. Whether you have to now depends on the numbers.

“As long as your child does not have earned income, the first $1,000 of income earned in an UGMA account is tax-free, since it is covered by the child’s standard deduction,” said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.

Anything over $1,000 but below $2,000 is taxed at your child’s tax rate, she said.

When your child’s earnings in the UGMA (or any other investment account) go over $2,000, they will be taxed at your income tax rate, Williams said.

“If preferred, the taxes for your child’s UGMA investment income can be recognized on your tax return,” she said. “To use this method, your child must be under age 19 (24 if a full-time student), only have income from interest and dividends, and have a gross income of $9,500 or less.”

This will likely result in paying more taxes, Williams said, but it will save the effort of filing multiple returns.

Those are the numbers for 2014. For 2015, the first $1,050 of unearned income will be tax-free, and the second $1,050 will be taxed at the child’s rate. Anything over $2,100 will be taxed at the parent’s rate.

You may want to consider transferring the money from the UGMA to a 529 Plan, said Gail Rosen, a Martinsville-based certified public accountant. That way you wouldn’t have to worry about filing a tax return now for your child or paying taxes of his or her behalf, or at least not for investment earnings, Rosen said.

“Any income earned within a 529 plan is excludable to the extent that it is used to pay for qualified higher education expenses,” Rosen said.

Yup. It’s a tax-free investment for education, and worth considering for any parent.

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This story was first posted in February 2015.