Money from Grandma?

vballmom
Tue, 11 May 2010 13:16:40 +0000

If the account is a UGMA or UTMA, any dividend income and capital gains would need to be declared on the child’s tax return if over a certain threshhold. For 2009 taxes, the child’s allowable investment income amount is $1,900, with the first $950 in earnings exempt but the next $950 taxed at the child’s rate. After that, the tax is assessed at the parents’ marginal rate.

In the OP’s case, on a $10,000 account there might not have been any taxable income or capital gains over the years (as in the case of an investment entirely in stocks). And it’s possible that the capital gain on liquidation won’t be very high if the money was invested in mutual funds which distribute capital gains every year. Good records are important here to determine the cost basis of the investment(s).

The gift tax exclusion was $12,000 in 2008 and $13,000 for 2009 and 2010. As bigtrees and others have pointed out, the gift tax is irrelevant for the OP, but Tatin is correct that checks from Grandma directly to the school avoid this issue entirely. Gifts are never taxable to the recipient; the only person who has to worry about staying under the annual or lifetime limit is Grandma, and it doesn’t seem like she’s at risk for hitting either limit.