Are UGMA Accounts Taxable? Kiddie Tax, Gift Tax, and Filing

Yes, UGMA accounts are taxable. Investment earnings in a Uniform Gifts to Minors Act custodial account are the child’s taxable income, not the parent’s. For the 2026 tax year, the first $1,350 of the child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed at the parent’s marginal rate under the IRS kiddie tax.¹ Contributions can also trigger federal gift tax rules, though each donor can give up to $19,000 per child in 2026 before any filing is required.

Who Owes the Tax

The child is the legal owner of everything in a UGMA account from the moment the gift is made, and the account is tied to the child’s Social Security number for federal tax reporting.² Every dollar of interest, dividends, and capital gains generated inside the account counts as the child’s income.³ The custodian handles investment decisions and paperwork, but the tax bill belongs to the child. That stays true if the custodian changes or the original donor dies.

The gift is also irrevocable. Once you put money into a UGMA account, you cannot take it back, and you cannot control what the child does with the balance once they reach the age of majority under state law.

How the Kiddie Tax Works

The kiddie tax stops families from parking large amounts of investment income in a child’s name to use lower tax brackets. It applies to all of the child’s unearned income — interest, dividends, capital gains, and similar earnings — whether that money is spent on the child or left to compound in the account.⁴

For 2026, the three tiers are:¹

First $1,350: covered by the child’s standard deduction, not taxed.
Next $1,350: taxed at the child’s own rate, typically 10 percent for a child with little or no earned income.
Above $2,700: taxed at the parent’s marginal rate, which is often much higher.

Financial institutions send a Form 1099-INT or 1099-DIV to the child when the account produces more than $10 of income in the year, and those forms give you the numbers you need at tax time.

Which Children Are Subject to the Kiddie Tax

The kiddie tax does not last forever. It applies to a child who meets one of these age and support tests, has at least one living parent at year end, and does not file a joint return:⁴

Under 18 at the end of the tax year.
Age 18, if the child’s earned income did not provide more than half of their own support.
Ages 19 through 23, if the child is a full-time student and earned income did not provide more than half of their own support.

Once a child ages out or earns enough to support themselves, all of the UGMA account’s investment income is taxed at the child’s own rate.

Capital Gains When Investments Are Sold

Every time the custodian sells stocks, mutual funds, or other holdings inside the account, any profit is a realized capital gain and counts as unearned income for the kiddie tax tiers.⁵ The rate depends on how long the asset was held:⁶

Held more than one year: long-term capital gains rates.
Held one year or less: taxed as ordinary income.

Realized gains are added to interest and dividends when determining whether the child crosses the $2,700 threshold. Rebalancing the portfolio creates a taxable event even when the cash never leaves the account.

Cost Basis for Gifted Stock

When someone donates appreciated stock or funds to the account, the child inherits the donor’s original cost basis, not the market value on the gift date.⁷ If a grandparent bought shares for $5,000 and gifted them when they were worth $15,000, the child’s basis stays at $5,000, and selling for $15,000 produces a $10,000 taxable gain.

One exception: if the donor’s cost was higher than the fair market value on the gift date, the basis for calculating a loss is capped at that lower gift-date value.⁷ Custodians should track both the donor’s purchase price and the fair market value on each gift date so gains and losses can be figured correctly later.

Gift Tax on Contributions

Every deposit into a UGMA account is a gift under federal tax law.⁸ The 2026 annual exclusion is $19,000 per recipient.⁹ If your total gifts to a particular child stay at or below that in a calendar year, you have nothing to file.

Married couples can double the exclusion by electing to split gifts. A gift from one spouse is then treated as coming half from each, letting them together give up to $38,000 per child without a return.¹⁰ Both spouses must sign the election on Form 709 even if only one actually contributed.¹¹

If a contribution exceeds the annual exclusion, the donor files Form 709. Filing does not mean you owe gift tax. The excess counts against the lifetime gift and estate tax exemption, which is $15,000,000 per person for 2026.⁹ Very few donors ever use that up. Skipping Form 709 when it was required can still create problems in a later audit or during estate settlement.

How to File the Child’s UGMA Income

How the income gets reported depends on how much the account earned and whether you want the child to file separately.

Form 8615 on the Child’s Return

When unearned income tops $2,700, Form 8615 generally must be filed with the child’s own return.¹² The form calculates the portion of the child’s unearned income taxed at the parent’s rate. The child files a Form 1040 with Form 8615 attached.

Form 8814 on the Parent’s Return

If the child’s only income is interest, dividends, and capital gain distributions and the total is under $13,500, parents can instead report it on their own return using Form 8814.¹³ That skips a separate return for the child. It also raises your adjusted gross income, which can shrink deductions and credits you would otherwise qualify for, so run the numbers before choosing.

If Nothing Gets Filed

When you do not use Form 8814, the child must file. Unreported UGMA earnings can draw interest on unpaid tax plus a late-filing penalty of up to 25 percent of the amount owed. The tax liability belongs to the child, but the parent or custodian is the one who has to make sure the return is filed on time.

Net Investment Income Tax

A child who files Form 8615 may also owe the 3.8 percent Net Investment Income Tax on investment earnings above certain thresholds.⁵ The NIIT applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for single filers.¹⁴ Because most children fall well below that, the NIIT only reaches very large UGMA accounts, and it is reported on Form 8960.

A Few Things Taxes Don’t Cover

Two consequences of UGMA ownership sit outside the tax calculation but often surprise families. First, because the child owns the account, the balance is treated as a student asset on the Free Application for Federal Student Aid and assessed at up to 20 percent when the Student Aid Index is calculated, a steeper hit than the 12 percent applied to parent-owned assets.¹⁵ Second, when the child reaches the age of majority under state law (usually 18 or 21), the custodian must hand over the assets outright, with no strings attached. Neither of these is a tax rule, but both shape whether a UGMA is the right container in the first place.

1
IRS.gov. Revenue Procedure 2025-32 – 2026 Adjusted Items
2
Cornell Law School. Uniform Gifts to Minors Act (UGMA)
3
Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
4
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
5
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
8
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
11
Office of the Law Revision Counsel. 26 USC 2513 – Gift by Husband or Wife to Third Party
12
Internal Revenue Service. 2025 Instructions for Form 8615
13
Internal Revenue Service. Instructions for Form 8814 (2025)
14
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
15
Federal Student Aid. FAFSA Pell Eligibility and SAI Guide