UTMA with Grandparent as Custodian: Who Reports the Taxable Income?

[jofijohnjoseph]

Sorry for a basic Tax 101 question, but if an individual has established a UTMA for a grandchild and is the custodian for the account, who is responsible for reporting the income if the child does not file their own returns?  The parent or the grandparent?  

[TAXOH]

The child. 

[jofijohnjoseph]

Can the grandparent choose to report the income on her returns on a voluntary basis?  Or must the income be reported by the child?

[TAXOH · Accepted solution]

1. I don't believe so.  It is under the child's ssn.  I have had to file returns for children if there is enough to require a return to be filed. 

[sjrcpa]

Only parents can elect to include a child's investment income on their return.

[BobKamman]

Stop and play this role-play game.  You answer phones for IRS.  Someone calls and tells you, "my grandchild has so much investment income he has to pay tax on some of it at his parents' 35% rate.  The investment is one I bought and I'm only in a 10% bracket.  Can we get around the kiddie tax?  I really don't want him to know about the money, and his parents don't really want to tell anyone their tax bracket."

What would be your answer?

[jofijohnjoseph]

Perhaps, but in this case, the client is in the 24% tax bracket, so doubt that is the motivation. What galls me is the former accountant who prepared last year's returns and signed off on this whole damm arrangement.  

[BobKamman]

Only a 24% bracket?  What are you doing there, trying to run a low-income taxpayer clinic?