- Families with young children can save for college with an account established under the Uniform Transfers to Minors Act. A child’s investment account can potentially earn up to $2,100 annually without incurring any tax liability.
- If the investment account earns higher amounts of income, the “kiddie tax” may apply, subjecting the income from the account over $2,100 to tax at the parents’ top marginal rate. The kiddie tax may apply to children 18 and older if their earned income does not exceed one-half of their support for the year.
- The annual gift exclusion can be used for parents to gift as much as $14,000 annually ($28,000 if two parents split gifts). In most states, the property in the investment account must be distributed to the child when he or she reaches age 21.
- Another college savings vehicle, a Sec. 529 plan, exempts earnings from investments in the plan from current taxation, and distributions from the plan that are used to pay the beneficiary’s qualified higher education expenses are also not taxed. Investing through a Sec. 529 plan may yield a more favorable financial aid calculation, since assets in a plan are counted as owned by the parents.
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Ford, Allen Ph.D & Wiebe, Zac. “Financing for college with the Uniform Transfers to Minors Act.” Journal of Accountancy July 2015: Page 58. Print.