How to Give Tax-Free Gifts to Children

Two ways to give a tax-free gift

A small investment can grow into a substantial tax-free gift

Wealth education includes knowing how to give a tax-free gift of money or assets. The Uniform Gifts to Minors Act, also referred to as the UGMA, was created in order to make it easier to gift tax-free assets and money to children. Parents, grandparents and others can open a UGMA account or a similar UTMA account, which stands for the Uniform Transfers to Minors Act, in a child's name. The account can then be used to give financial gifts, as well as to purchase investments, such as stocks and bonds for the child. The adult who opens the account is the account's custodian until the child reaches the legal age required to manage their own account, and accounts are always governed by the laws of the particular state where they were established.

Tax-free UGMA and UTMA investments

With either a UGMA or a UTMA investment, yearly taxes are not due until the gains on the account total a minimum of $1,700 dollars. When taxes are due, however, they are based upon the child's parent's highest marginal tax rate until the child turns 18 and then the taxes are calculated according to the child's lower tax rate. In fact, the initial unearned income totaling $850 is tax exempt for the child regardless of age. The second $850 in unearned income is taxed based upon the child's current tax bracket. When the unearned income from the account grows beyond $1700, the child's age is used to determine whether taxes will be based upon the parent's tax bracket or the child's. ... click here to read the rest of the article titled "How to Give Tax-Free Gifts to Children"