Custodial Accounts for Grandchildren

[DonC1]

We have Custodial accounts with EDJones for each of the grandchildren.  I am listed as the Custodian and (Grandchild) under the age of 21.  The statements and Dividend reports are sent to me.  Am I responsible for paying taxes on the dividends earned in those accounts?

Thank you,

Don

[macuser_22]

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@DonC1 wrote:

We have Custodial accounts with EDJones for each of the grandchildren.  I am listed as the Custodian and (Grandchild) under the age of 21.  The statements and Dividend reports are sent to me.  Am I responsible for paying taxes on the dividends earned in those accounts?

Thank you,

Don

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No.   If the child is required to file a tax return they go on the child's own tax return.

(Custodial accounts normal end when the child becomes an adult at age 18.)

[DonC1]

Thank you for your reply.  If the children are still very young, 1-10, and do not file, then would I have to enter the values on my taxes?

Thank you,

Don

[macuser_22]

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@DonC1 wrote:

Thank you for your reply.  If the children are still very young, 1-10, and do not file, then would I have to enter the values on my taxes?

Thank you,

Don

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@DonC1 wrote:

Thank you for your reply.  If the children are still very young, 1-10, and do not file, then would I have to enter the values on my taxes?

Thank you,

Don

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No.   It is not your income - it is the child's income.   You are just the adult custodian of the account.   If the income exceeds $1,100 then the child must file a tax return.

2020 Filing requirements for dependents.

Single dependents— (Not age 65 or older or blind)

You must file a return if any of the following apply.
1. Your unearned income was more than $1,100.
2. Your earned income was more than $12,400.
3. Your gross income was more than the larger of—
a. $1,100, or
b. Your earned income (up to $12,050) plus $350.

Or Dependent had net earnings from self-employment of at least $400. 

However, if any tax was withheld, then Dependent might want to file anyway to get a refund of the tax withheld.

Also, a person that CAN be a dependent cannot claim him/her self and must check the box that says that another taxpayer can claim them (whether or not that taxpayer actually claims him/her).

Note: your state filing requirements might be different than the federal.

[Critter-3]

LOOK at the tax reporting form ... if the SS# is the child's then it goes on the child's return IF the child is required to file.   If you don't claim the child as a dependent   then you need to give the child's paperwork to the person who is claiming the child so they can decide if the child has to file a return   OR  add  the child's income on their return.  

[Hal_Al]

If each child's yearly income, including any capital gains, is more than $1100, the child must file a tax return.  The parent can sign the return, for the child. 

There is an exception; If the child's only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on the parent's return (not the grandparent-custodian), using form 8814.
But, it is usually best for the child to file a separate return, as qualified dividends and capital gain distributions could be taxed at a higher rate on the parent's return. 

[Frankie68]

Custody of two grandchildren for seven months of 2021I filed as dependents yet the mother did also. Who is qualified to claim the two kids ad dependents?

[Hal_Al]

Q. Custody of two grandchildren for seven months of 2021I filed as dependents yet the mother did also. Who is qualified to claim the two kids ad dependents?

A. Simple answer: you.  You are closely related and they lived with you for more than half the year.  The mother is more closely related but the kids were with her less than half the year (unless she also lived with you while the kids lived with you).

If someone else claimed your dependent inappropriately, and if they file first, your return will be rejected if e-filed. You would then need to file a return on paper, claiming the child as  appropriate. The IRS will process your return and send you your refund, in the normal time. Shortly (up to a year) thereafter, you'll receive a letter from the IRS, stating that your child was claimed on another return. It will tell you that if you made a mistake to file an amended return and if you didn't make a mistake to do nothing. The other party will get the same letter you did. If one of you doesn't file an amended return, unclaiming the child, the next letter, from the IRS, will require you to provide proof. Be sure to reply in a timely manner.

Winner gets the tax benefits; loser gets to pay the IRS back with penalties and interest. The IRS goes by physical custody, not legal custody.  

https://www.thebalance.com/claiming-same-dependent-audit-risk-3193030 (audit discussion)