For years, many parents and grandparents have used Uniform Gifts to Minors Accounts (UGMAs) and Uniform Transfers to Minors Accounts (UTMAs) to save money in their child\u2019s or grandchild\u2019s name. These funds can then be used to help pay for future college education and other expenses.\r\n\r\nUsing UTMAs and UGMAs to gift money to minors in this way can reduce income taxes. This is because some, but not all, of the money is tax-free and some is taxed at the child\u2019s lower rate.\r\nWhat is the \u201cKiddie Tax\u201d?\r\nThe tax reform that was signed into law in December makes some important changes to the taxation of earnings within UTMAs and UGMAs. These changes relate to what\u2019s often referred to as the \u201ckiddie tax.\u201d\r\n\r\nAs noted above, when parents and grandparents give money to children, only a portion of the gift is tax-advantaged. In general, the first $1,050 of a child\u2019s unearned investment income (interest, dividends and capital gains distributions) is tax free, while the next $1,050 is taxed at the child\u2019s rate (probably 10%).\r\n\r\nAll unearned income above $2,100 was previously taxed at the parent\u2019s or grandparent\u2019s marginal rate. This taxation is known as the \u201ckiddie tax,\u201d though it\u2019s not really a separate tax. Instead, it\u2019s an income threshold above which a child\u2019s unearned income is subject to higher taxes.\r\n\r\nThe IRS defines a child as being under 19 years of age or a full-time college student under 24 years of age. Previously, a child was defined as being under 14 years of age for kiddie tax purposes, but the age was increased by Congress to reduce opportunities for potential kiddie tax savings.\r\nImpact of Tax Reform\r\nThe tax reform act made an important change to the kiddie tax. Starting with 2018 tax returns, instead of a child\u2019s unearned income above $2,100 being taxed at the parent\u2019s or grandparent\u2019s marginal tax rate, it will be taxed at trust and estate tax rates. These rates in 2018 are as follows:\r\n\r\n\r\n\r\nUnearned Income\r\nTrust & Estate Tax Rate\r\n\r\n\r\nUp to $2,550\r\n10%\r\n\r\n\r\n$2,551-$9,150\r\n24%\r\n\r\n\r\n$9,151-$12,500\r\n35%\r\n\r\n\r\nOver $12,500\r\n37%\r\n\r\n\r\n\r\nSo will this new rule result in a lower or higher kiddie tax? The answer depends on the amount of unearned income that\u2019s subject to the kiddie tax and the parents\u2019 or grandparents\u2019 tax bracket.\r\nOur Take\r\nThe details surrounding using UTMAs and UGMAs to give money to children and the potential tax implications can be complex and confusing. Be sure to speak with a tax and\/or investment professional about your situation in more detail.\r\n\r\nRead our free Personal Capital 2018 Tax Guide for Holistic Financial Planning to learn more about taxes and your long-term financial planning.\r\n\r\nDownload guide\r\n\r\nThis blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.