Who pays the taxes in my custodial account?
Cash and securities deposited into a custodial account are considered gifts, and may be subject to the gift tax if they exceed the annual exclusion limit, which is $16,000 per child (recipient) in 2022. Gifts over this amount will count towards your lifetime exclusion limit ($12.06 million in 2022). Any amount you give over that in your life is subject to tax, even if below the annual limit. The donor (gift giver) is typically responsible for paying the gift tax.
If you’ve set up your child with a custodial brokerage account, they are the ones responsible for paying taxes on gains. The first $1,150 is tax free, and the next $1,150 is taxed at the minor’s tax rate—typically extremely low or 0%. This is known as the “kiddie tax”. The kiddie tax also extends to individuals aged 19-24 who are still listed as dependents, and enrolled as full time students, meaning it’s not too late for college students to take advantage.
Earnings above $2,300 in a custodial account are taxed at the parent’s marginal tax rate. If your child’s income is entirely from interest or dividends (meaning not from wages), and it totals less than $11,500, you can choose to include their income on your taxes, rather than file a separate return for them.