How Is a UTMA Account for a Grandchild Taxed? (w/Examples) + FAQs

This article reflects federal rules and general state rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes often — confirm current figures with IRS.gov before you file.

Quick Answer

A UTMA account for a grandchild is taxed to the child, not the grandparent. For 2025 and 2026, the first $1,350 of the child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and anything over $2,700 is taxed at the parents’ rate under the kiddie tax.

The money you put in a Uniform Transfers to Minors Act (UTMA) account belongs to your grandchild the moment you fund it, so the IRS treats the investment income as the child’s income — not yours. That single fact surprises most grandparents, because the tax bill that lands above $2,700 is figured at the parents’ marginal rate, a rule called the kiddie tax that exists to stop families from shifting investment income to a child’s low bracket.

The stakes are real and the timing matters. Roughly 56% of parents save for their kids using some form of custodial or college account, and a UTMA that grows for 15 years can easily throw off enough dividends and capital gains to trigger a return for a child who has never held a job. Miss the filing, pick the wrong form, or assume your state copies the federal rules, and a gift meant to help can quietly create penalties, interest, and a higher tax than you expected.

💰 How the three-tier kiddie tax brackets work for 2025 and 2026, with the exact dollar thresholds.
🧾 When your grandchild must file a return, and whether to use Form 8615 or Form 8814.
📈 A fully worked example showing the real tax owed on a UTMA that sells appreciated stock.
🏛️ Why the parents’ tax rate — not yours as the grandparent — sets the bill, and what that means.
⚠️ The seven costliest UTMA mistakes, plus how UTMA stacks up against a 529 and a new Trump Account.

What a UTMA Account Actually Is

A UTMA account is a custodial account that lets an adult hold money or investments for a minor without setting up a formal trust. The Uniform Transfers to Minors Act is a state law, adopted in some form by nearly every state, that defines how these accounts work. As the grandparent, you can open the account and serve as custodian, meaning you manage the money. But legally, the money is your grandchild’s from day one.

The custodian controls the account only until the grandchild reaches the age of majority for UTMA purposes. That age is set by state law and is often 21, even where the legal adult age is 18 — in New York, for example, the custodian keeps control until 21. When that birthday arrives, the now-adult grandchild can take the cash and spend it on anything, with no strings. The consequence: you cannot claw the money back or redirect it, because a UTMA gift is irrevocable.

A common misconception is that the custodian “owns” the account because they manage it. They do not. The custodian is a manager with a legal duty to use the funds for the minor’s benefit, not a piggy bank for the adult. What you should do about this: name a custodian you trust, fund the account knowing the gift is permanent, and keep clean records of every deposit and every trade, because those records drive the tax math later.

UTMA vs. UGMA

The older Uniform Gifts to Minors Act (UGMA) account is UTMA’s cousin. UGMA accounts can hold only financial assets like cash, stocks, and bonds. UTMA accounts can hold those plus real estate, art, and other property, which makes UTMA the broader and more common choice today.

For tax purposes, the two are treated the same. The kiddie tax, the filing thresholds, and the gift rules apply identically. The practical difference is what you can put inside the account and, in a few states, the age the child takes control. If you are choosing today, UTMA gives you more flexibility, and the tax treatment will not differ.

The Two Tax Events: Funding It and Earning Inside It

A UTMA touches the tax system twice, and grandparents often confuse the two. The first event is the gift you make when you put money in. The second is the income the investments earn each year. They follow completely separate rule books, and mixing them up leads to wrong assumptions about who owes what.

The gift side is governed by federal gift tax rules. The income side is governed by the kiddie tax and ordinary income rules. You can owe nothing on the gift and still face a yearly income tax bill, or make a small gift that never grows and owe nothing on either side. Understanding which event you are dealing with tells you which form to worry about and which deadline to watch.

The rest of this guide walks through both events with real numbers, then shows you exactly how to report the income, what to avoid, and how UTMA compares to other ways to save for a grandchild.

Tax Event One: The Gift of Funding the UTMA

When you move money or assets into your grandchild’s UTMA, the IRS treats it as a completed gift to the child. That matters because of the annual gift tax exclusion, the amount you can give one person each year without filing a gift tax return. For 2025, the annual exclusion is $19,000 per giver, per recipient; for 2026 it rises to $19,000 as well under current inflation adjustments, so confirm the figure for the year you give.

Here is the relief most grandparents need: even if you give more than the exclusion, you almost never write a gift tax check. You simply file Form 709, the gift tax return, and the excess reduces your lifetime gift and estate exemption, which sits in the multi-millions. The consequence of skipping that form when required is a late-filing problem, not usually a tax bill — but the IRS can assess penalties, so file it.

A real misconception is that two grandparents are capped at one $19,000 gift. In fact, a married couple can give $38,000 to one grandchild in 2025 by combining both exclusions. What you should do: if you and your spouse want to seed the account heavily, split the gift so each of you stays at or under the per-person exclusion, or file Form 709 and use part of your lifetime exemption on purpose.

A Note on Appreciated Stock

If you fund the UTMA with appreciated stock instead of cash, the gift carries your cost basis to the child. The child inherits what you originally paid, not the current value. When those shares are later sold inside the UTMA, the gain is measured from your old basis, which can mean a larger taxable gain than you expect.

This is a frequent and costly surprise. Giving low-basis stock to a grandchild does not erase the built-in gain — it transfers it. The consequence is a capital gain on the child’s return when sold, potentially taxed partly at the parents’ rate. What to do: track the original purchase price and date, hand those records to the custodian, and weigh whether gifting cash is cleaner than gifting deeply appreciated shares.

Tax Event Two: How the Income Is Taxed (The Kiddie Tax)

Every year, the dividends, interest, and capital gains inside the UTMA are the child’s unearned income. Unearned income means money from investments rather than from a job. The kiddie tax then sorts that unearned income into three layers, and the layers are the heart of how a UTMA is taxed.

The kiddie tax exists to stop income shifting — the old trick of parking investments in a child’s name to use their low bracket. The thresholds were the same for 2025 and 2026, which makes planning easier across the two years. The catch that stings grandparents: once income clears the top layer, it is taxed at the parents’ marginal rate, which can be far higher than the child’s.

For 2025 and 2026, the three layers of a dependent child’s unearned income work like this:

Unearned Income Layer (2025 & 2026)	How It Is Taxed
First $1,350	Tax-free (covered by the dependent’s standard deduction)
Next $1,350 (up to $2,700 total)	Taxed at the child’s own low rate
Everything above $2,700	Taxed at the parents’ marginal rate via Form 8615

The consequence of crossing $2,700 is that the gift you made for your grandchild now raises their parents’ tax bill, because the excess is stacked on the parents’ top rate. A common misconception is that the grandparent’s income or rate matters here — it does not. What to do: estimate the account’s yearly income before the account grows large, and if it routinely tops $2,700, lean toward tax-efficient holdings that throw off less taxable income each year.

Who the Kiddie Tax Applies To

The kiddie tax does not stop at little kids. For the 2026 tax year, Form 8615 applies to a child with more than $2,700 of unearned income who, at year-end, is under 18, is 18 with earned income that is not more than half their support, or is a full-time student age 19 through 23 with earned income not over half their support.

That last bracket catches college-age grandchildren by surprise. A 22-year-old full-time student with a UTMA that sells stock for tuition can still be taxed at the parents’ rate. The consequence is a bigger bill in the very year the family planned to spend the money. What to do: time large sales carefully, and if the student stops being a full-time dependent, the kiddie tax may no longer apply.

Which Situation Applies to You?

The right answer depends on how much the UTMA earns and who reports it. Use these branches to jump to your case.

The UTMA earned $1,350 or less this year: No tax is due and usually no return is required for that income. You are in the simplest case — keep the 1099 for records and move on.
The UTMA earned between $1,350 and $2,700: A return is generally required, but the tax is light because it is figured at the child’s low rate. See the worked example below.
The UTMA earned more than $2,700: The kiddie tax applies. You must use Form 8615 on the child’s return, or the parents may elect Form 8814 to report it on their own return if the rules fit.
The grandchild is a full-time student age 19–23: The kiddie tax can still apply. Read the “Who the kiddie tax applies to” section again before selling assets.
The account holds appreciated stock you gifted: Watch the carried-over basis before any sale, because the gain may be larger than the recent growth suggests.

When Your Grandchild Must File a Return

A dependent grandchild must generally file their own federal return when unearned income tops $1,350 for 2025 or 2026, because that is where the dependent’s standard deduction for unearned income runs out. Below that line, the income is sheltered and no return is needed for it. Cross it, and a return is the rule, not the option.

If unearned income is more than $2,700, the child must file Form 8615 attached to their Form 1040 to compute the kiddie tax. The consequence of skipping the return is failure-to-file and failure-to-pay penalties plus interest, all landing on a young person who likely has no other income. What to do: check the 1099 the custodian receives each January, run the numbers, and file by the standard April 15 deadline (April 15, 2026, for the 2025 tax year).

A Fully Worked Example

Here is the math, step by step, so you can copy it for your own grandchild. Assume it is the 2025 tax year, the grandchild is 12 and a dependent, and the UTMA produced $5,000 of unearned income: $1,000 in dividends and $4,000 in long-term capital gains from a stock sale. Assume the parents are in the 24% bracket.

Layer 1 — First $1,350: Tax-free. Tax = $0.
Layer 2 — Next $1,350 (income from $1,350 to $2,700): Taxed at the child’s rate. For long-term gains and qualified dividends in this range, the child’s rate is often 0%, so tax here is about $0.
Layer 3 — Income above $2,700: $5,000 − $2,700 = $2,300 taxed at the parents’ rate. Because this $2,300 is long-term capital gain and qualified dividends, it is taxed at the parents’ long-term capital gains rate of 15%, not 24%. Tax = $2,300 × 15% = $345.

The grandchild’s total federal tax on the $5,000 is about $345. The key lesson: the character of the income matters. Long-term gains and qualified dividends keep their preferential rates even when pushed to the parents’ return, while ordinary interest above $2,700 would have been taxed at the full 24%, costing $552 on the same $2,300. What to do: favor long-term holdings and qualified dividends inside a UTMA to keep the top-layer tax low.

Reporting the Income: Form 8615 vs. Form 8814

There are two ways to put a grandchild’s UTMA income on a tax return, and the choice belongs to the parents, not the grandparent. Form 8615 files the kiddie tax on the child’s own return. Form 8814 lets the parents pull the child’s income onto their return so the child files nothing. Each has strict rules and different consequences.

Form 8615 is the default and the only option once the income is large or includes wages. It is titled “Tax for Certain Children Who Have Unearned Income” and attaches to the child’s Form 1040. The consequence of using it correctly is an accurate kiddie-tax figure; the consequence of ignoring it when required is penalties. What to do: use Form 8615 whenever unearned income tops $2,700 and Form 8814 does not fit.

Form 8814, “Parent’s Election to Report Child’s Interest and Dividends,” is allowed only when the child is under 19 (or under 24 and a full-time student), the income is only interest and dividends (including capital gain distributions), the child’s gross income is under $13,000 for 2025, and the child files no joint return. The consequence of electing it can be a slightly higher bill, because it can bump the parents’ adjusted gross income and limit some deductions. What to do: use Form 8814 only for small, simple dividend-and-interest accounts where skipping a separate return is worth it.

Quick Comparison of the Two Forms

Feature	Form 8615 (child’s return)
Who files	The child files their own Form 1040
Income types allowed	All unearned income, including capital gains from sales
Best for	Larger accounts, or any account that sold stock

Feature	Form 8814 (parents’ return)
Who files	Parents add income to their Form 1040; child files nothing
Income types allowed	Only interest, dividends, and capital gain distributions — under $13,000 for 2025
Best for	Small, simple accounts with no stock sales

Federal vs. State: Does Your State Tax the UTMA Income?

Everything above is federal law. Your state has its own rules, and it will not always match Washington. Most states with an income tax do tax a child’s investment income, but the way they tax it varies, and a handful of states have no income tax at all. Never assume your state copies the federal kiddie tax.

States like Texas, Florida, Nevada, and Washington levy no broad personal income tax, so a UTMA’s ordinary investment income faces no state income tax there — a clean and complete answer. States like California and New York do tax the income, and California in particular does not always follow federal kiddie-tax mechanics line for line. The consequence of guessing is an underpaid state return and state penalties. What to do: check your state tax agency’s site, such as the California Franchise Tax Board or New York Department of Taxation, for how it treats a dependent child’s investment income.

The age the grandchild takes control is also a state question, set by each state’s version of the UTMA, often 18 or 21. That timing affects when large sales happen, which affects the year the tax hits. What to do: confirm your state’s UTMA age of majority before planning a college-year sale.

Three Common Scenarios

Scenario 1 — A small, quiet account.

Situation	Tax Result
Grandma funds a UTMA with $10,000; it earns $900 in dividends in 2025	Income is under $1,350, so it is tax-free and generally no return is needed for it

Scenario 2 — A growing account crosses the line.

Situation	Tax Result
A 10-year-old’s UTMA earns $3,500 of dividends and interest in 2025	First $1,350 free, next $1,350 at child’s rate, remaining $800 taxed at parents’ rate on Form 8615

Scenario 3 — Selling stock for college.

Situation	Tax Result
A 19-year-old full-time student sells UTMA stock for $20,000 of long-term gain	Kiddie tax still applies; gain above $2,700 taxed at parents’ capital gains rate via Form 8615

Three Named Examples

Maria, the cautious grandmother. Maria opens a UTMA for her grandson Leo and funds it with $15,000 in cash in 2025 — under the $19,000 exclusion, so no Form 709. She buys a broad index fund that pays modest qualified dividends of about $400 a year. Because the income stays under $1,350, Leo owes no tax and files no return for it. Maria’s lesson: low-yield, growth-focused holdings keep a small UTMA tax-free for years.

Frank and the appreciated stock. Frank gifts his granddaughter Ava $30,000 of stock he bought decades ago for $5,000. The basis carries over, so when the custodian sells $10,000 worth to rebalance, the gain is measured from Frank’s old basis and produces a large taxable capital gain on Ava’s return. The portion above $2,700 is taxed at her parents’ 15% capital gains rate. Frank’s lesson: gifting low-basis stock transfers the built-in gain to the grandchild.

The Patel family at college time. The Patels’ UTMA for their 20-year-old full-time student daughter sells investments for $18,000 of long-term gain to pay tuition in 2026. Because she is a full-time student under 24 without large earned income, the kiddie tax applies, and the gain over $2,700 is taxed at the parents’ capital gains rate on Form 8615. Their lesson: the kiddie tax can reach college-age students, so spread big sales across years when possible.

Seven Mistakes to Avoid

Assuming the income is taxed to the grandparent. It is the child’s income; the kiddie tax uses the parents’ rate, and missing this leads to the wrong return entirely.
Forgetting the child must file once unearned income tops $1,350. Skipping it triggers failure-to-file and failure-to-pay penalties plus interest.
Using Form 8814 when the account sold stock. Form 8814 allows only interest, dividends, and capital gain distributions; using it wrongly produces an inaccurate return.
Gifting deeply appreciated stock without tracking basis. The carried-over basis can create a far larger taxable gain than the recent growth suggests.
Ignoring state tax rules. Many states tax the income differently from the federal rules, and guessing causes underpaid state returns and penalties.
Overfunding without filing Form 709. Gifts above the annual exclusion require the gift tax return even when no tax is due.
Treating the account as your own money. A UTMA gift is irrevocable; pulling funds back for yourself can be a legal breach of your custodial duty.

Do’s and Don’ts

Do’s

Do hold tax-efficient investments inside the UTMA, because lower yearly income keeps you under the $2,700 kiddie-tax line.
Do keep every 1099 and trade record, since the child’s return depends on accurate income and basis figures.
Do confirm your state’s rules, because state tax and the age of majority both vary and affect timing.
Do consider gifting cash over low-basis stock, to avoid transferring a large built-in gain to your grandchild.
Do file Form 709 when you exceed the annual exclusion, even though tax is rarely owed, to stay compliant.

Don’ts

Don’t assume two grandparents are limited to one exclusion, because a couple can gift $38,000 to one grandchild in 2025.
Don’t elect Form 8814 for a complex account, since it can raise the parents’ AGI and limit deductions.
Don’t forget college-age students can owe kiddie tax, which can spike the bill in the tuition year.
Don’t expect to reclaim the money, because the gift is irrevocable once made.
Don’t skip the child’s return to save effort, as penalties and interest cost far more than filing.

Pros and Cons of a UTMA for a Grandchild

Pros

Simple to open, because a UTMA needs no formal trust or attorney, saving setup cost and time.
Flexible use, since funds are not limited to education and can cover any need that benefits the child.
Some tax sheltering, because the first $1,350 of unearned income is tax-free each year.
Broad investment menu, as UTMA accounts can hold stocks, funds, real estate, and more.
Teaches money skills, giving the grandchild a real asset to learn from as they near adulthood.

Cons

Irrevocable, so you lose all control of the gift once it is made.
Child gains full control at the state’s age of majority and can spend it freely.
Kiddie tax exposure, because income over $2,700 is taxed at the parents’ higher rate.
Financial aid impact, since a UTMA is the student’s asset and weighs heavily in college aid formulas.
No tax-free growth, unlike a 529, which shelters earnings used for education.

UTMA vs. 529 vs. Trump Account

A UTMA is one of three popular ways to save for a grandchild, and the tax treatment differs sharply. A 529 plan grows tax-free for qualified education costs. A Trump Account, created by the 2025 One Big Beautiful Bill Act, is a new tax-advantaged account for children with its own rules.

Trump Accounts allow up to $5,000 in contributions per year for a child under 18, with contributions starting no earlier than July 4, 2026, and the limit indexed for inflation after 2027. Children born from 2025 through 2028 may receive a one-time $1,000 pilot contribution from the Treasury. These accounts are new, and the IRS is still issuing guidance, so details may change — confirm before relying on them.

Account Type	Key Tax Feature
UTMA	Income taxed yearly to the child; kiddie tax applies over $2,700; funds usable for anything
529 plan	Earnings grow tax-free for qualified education; broad state tax perks
Trump Account	New for 2025 law; $5,000 annual limit, tax-advantaged growth, rules still being finalized

What to Do Next

Pull the latest 1099 from the UTMA custodian each January to see the year’s unearned income.
Compare the income to the $1,350 and $2,700 thresholds for the tax year to learn whether a return is required.
Choose the form: Form 8615 on the child’s return for larger or stock-selling accounts, or Form 8814 on the parents’ return for small interest-and-dividend accounts.
Check your state’s rules at your state tax agency for how it taxes the income and when control passes to the grandchild.
File by April 15 (April 15, 2026, for the 2025 tax year), and file Form 709 if your gift topped the annual exclusion.
Call a professional when the account is large, holds appreciated stock, or involves a college-year sale. A CPA or tax preparer can run Form 8615, and these reviews typically cost a few hundred dollars — far less than a penalty.

This article is educational and is not a substitute for advice from a licensed CPA, tax attorney, or estate attorney for your specific situation.

FAQs

Who pays the tax on a grandchild’s UTMA account?

The grandchild. The income is the child’s, but amounts over $2,700 for 2025 and 2026 are taxed at the parents’ marginal rate under the kiddie tax — never at the grandparent’s rate.

How much UTMA income is tax-free in 2025?

$1,350. For both 2025 and 2026, the first $1,350 of a dependent child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and amounts over $2,700 hit the parents’ rate.

Does a grandchild have to file a tax return for a UTMA?

Yes, generally once unearned income tops $1,350 for 2025 or 2026. If it exceeds $2,700, the child must file Form 8615 to figure the kiddie tax.

Can a grandparent deduct UTMA contributions?

No. UTMA contributions are after-tax gifts, not deductible. They may use part of your annual gift tax exclusion, which is $19,000 per recipient for 2025.

Is a UTMA gift to a grandchild reversible?

No. A UTMA gift is irrevocable. The money legally belongs to the grandchild and passes fully to their control at the state’s age of majority, often 18 or 21.

What is Form 8615 used for?

Form 8615 computes the kiddie tax on a child’s unearned income over $2,700 and attaches to the child’s Form 1040. It applies the parents’ marginal rate to the excess.

When can parents use Form 8814 instead?

When the rules fit: the child is under 19 (or under 24 and a full-time student), has only interest and dividends, gross income under $13,000 for 2025, and files no joint return.

Does the kiddie tax apply to a college-age grandchild?

Yes, it can. A full-time student age 19 through 23 with over $2,700 of unearned income and low earned income is still subject to the kiddie tax for 2026.

Do all states tax UTMA income?

No. States like Texas and Florida have no income tax, so they do not tax it. States like California and New York do, sometimes with rules that differ from federal.

Does a UTMA hurt college financial aid?

Yes. A UTMA is the student’s asset and is weighed heavily in aid formulas, often reducing aid more than a parent-owned 529 plan would.

How is gifted appreciated stock in a UTMA taxed?

At the carried-over basis. The child inherits the grandparent’s original cost basis, so a later sale can produce a large capital gain, taxed partly at the parents’ rate if over $2,700.

What happens if I gift more than $19,000 to one grandchild?

File Form 709. The gift tax return is required, but tax is rarely owed; the excess simply reduces your large lifetime gift and estate exemption.

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