The tax consequences of the Uniform Gifts to Minors Act, along with its successor the Uniform Transfers to Minors Act, fall on both sides of the account. The child owes income tax on whatever the account earns, with a three-tier Kiddie Tax structure that pushes higher earnings up to the parents’ rate. The donor faces gift tax filing rules on contributions, potential estate tax inclusion if they also serve as custodian, and a carryover basis that eliminates the step-up their heirs would otherwise receive. The account also reduces college financial aid eligibility more sharply than most alternatives.
How the Child Is Taxed on Account Earnings
Every dollar of interest, dividends, capital gains, and rent produced inside a UGMA or UTMA account belongs to the child for tax purposes. The child is the legal owner from the moment assets are contributed, and the IRS treats the earnings as the child’s unearned income. For 2026, that income runs through three tiers.
The first $1,350 is effectively tax-free, wiped out by the standard deduction available to a dependent with investment income.1Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) The next $1,350 is taxed at the child’s own rate, which for a child with no wage income is 10% on ordinary income. Anything above $2,700 is taxed at the parents’ marginal rate under the Kiddie Tax.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
Long-term capital gains realized inside the account still qualify for preferential capital gains rates, but the rate is set by the parents’ income level once the Kiddie Tax applies. A child holding appreciated stock in a custodial account can face a 15% or 20% long-term rate based on where the parents land.
Who the Kiddie Tax Reaches
The rule catches more people than most families expect. It applies automatically to children under 18. It applies to 18-year-olds whose earned income does not exceed half their own support. And it applies to full-time students aged 19 through 23 under that same support test, so a college student whose summer job covers less than half the cost of supporting them is still inside the Kiddie Tax.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
Once the child ages out or earned income crosses the support threshold, custodial account income is taxed at the child’s own rate across the board.
Which Parent’s Rate Applies
Married parents filing jointly use their combined income. Married filing separately uses the higher-income parent’s return. For divorced or unmarried parents, the rate comes from the parent who had custody for most of the year, even if the other parent funded the account.3Internal Revenue Service. Instructions for Form 8615 (2025)
How the Income Gets Reported
Brokerages issue Forms 1099 in the child’s Social Security number. From there, families choose between two reporting paths.
When the child’s unearned income exceeds $2,700, the child generally files their own Form 1040 with Form 8615 attached. Form 8615 calculates the tax on the portion of unearned income subject to the parents’ rate, and the parent’s name, Social Security number, and filing status go on the form.4Internal Revenue Service. Form 8615 – Tax for Certain Children Who Have Unearned Income The parent or custodian signs. Filing separately for the child preserves the lower rates on the first two tiers.
The shortcut is Form 8814. If the child’s only income is interest, dividends, and capital gain distributions totaling less than $13,500, the parent can report the child’s income on their own return instead of filing a separate one for the child.5Internal Revenue Service. Instructions for Form 8814 (2025) The trade-off: the child loses the benefit of the lower two tiers, and all reported income above $2,700 gets folded into the parents’ return at the parents’ rate. For modest earnings, 8814 saves paperwork without costing much. For accounts producing several thousand dollars a year, the separate return with 8615 typically produces a lower combined bill.1Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
Gift Tax on Contributions
Every contribution to a UGMA or UTMA account is an irrevocable gift. The donor cannot take it back, redirect it to another child, or reclaim it for personal use. The custodian has a fiduciary duty to manage the assets solely for the child’s benefit.
For 2026, a donor can contribute up to $19,000 per child without any gift tax filing requirement. A married couple electing to split gifts can contribute up to $38,000 per child. Contributions within those limits don’t reduce the donor’s lifetime exemption and don’t require Form 709.6Internal Revenue Service. What’s New – Estate and Gift Tax
Above $19,000 per donor per child in a single year, the donor must file Form 709. Filing doesn’t necessarily mean owing tax. The excess counts against the donor’s lifetime gift and estate tax exemption, which is $15,000,000 for 2026 following the changes enacted by the One, Big, Beautiful Bill.6Internal Revenue Service. What’s New – Estate and Gift Tax Couples electing gift splitting must file Form 709 even when the combined gift per child stays under $38,000, because the split itself triggers the filing requirement.7Internal Revenue Service. Instructions for Form 709
UGMA and UTMA contributions qualify as present-interest gifts, which is what makes the annual exclusion available. The custodian can spend the property for the child’s benefit before majority, and any remainder passes to the child at that point.8Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
Estate Tax Risk When the Donor Also Serves as Custodian
Here is the trap. If the person who funded the account also serves as custodian and dies before the child reaches the age of majority, the entire account is pulled back into the donor’s taxable estate. The IRS treats the custodian’s power to spend account assets for the child’s benefit as a retained power to change the terms of the gift, which is enough to trigger inclusion under the estate tax rules for revocable transfers.9Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers
The fix is straightforward. Don’t serve as custodian on an account you fund. Name a spouse, grandparent, or other trusted adult. For accounts already set up with the donor as custodian, appointing a successor eliminates the risk going forward, though how to make that change depends on state law and the financial institution.
With the exemption at $15,000,000 for 2026, actual estate tax only lands on very large estates. Inclusion still matters for planning, because it consumes exemption that could otherwise shelter other assets.6Internal Revenue Service. What’s New – Estate and Gift Tax
Carryover Basis at Termination
The account terminates when the child reaches the age of majority, which ranges from 18 to 25 depending on the state and how the transfer was structured. Control passes to the now-adult beneficiary, who can do whatever they want with the assets. The handoff is not a taxable event, because the child already owned the property the whole time.
What does carry over is the donor’s cost basis. The child inherits the donor’s original basis in the contributed assets, not their market value at any later date. If a parent contributed stock worth $5,000 with a basis of $2,000, the child’s basis is $2,000. When the child eventually sells, the gain runs from that $2,000 starting point.10eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift
This is one of the less visible costs of gifting appreciated assets during life. Had the donor held the stock until death, heirs would have received a stepped-up basis equal to the date-of-death value, potentially erasing the built-in gain. Gifting it into a custodial account locks in the lower basis and can produce a materially larger tax bill when the child sells.
Impact on College Financial Aid
Not strictly a tax, but it belongs in the same conversation. Because the child legally owns the custodial assets, the federal financial aid formula treats a UGMA or UTMA account as a student asset and assesses it at up to 20% per year on the FAFSA. Money in a parent-owned 529 plan is assessed at roughly 5.6% as a parental asset. For households likely to qualify for need-based aid, the combination of Kiddie Tax and the 20% assessment rate makes these accounts one of the least efficient ways to save for a child’s education.