Uniform transfer to Minor accounts are not "exempt from tax". Generally, minors with these accounts don't have to file taxes, so earnings under the child's name is XXXXX XXXXX if under a certain amount. If the child earns only investment income and it is more than the standard deduction for dependents with only investment income (850 in 2006), then the child has a filing requirment for federal taxes. If the child has earned income, the calculation is a little different.
What you may be referring to that you heard about withdrawals from a certain type of account is probably either Coverdell ESA (meant for education expenses) or Education 529 accounts. In these types of accounts, distributions including earnings are tax free if used for qualified education expenses.
There is no such law yet regarding UTMA accounts. When you cash in the funds, the gain will be taxable to the child.
Hi there again,
If none of the funds were sold, there will be no capital gains (capital gains are recognized when the funds are sold). However, since these are mutual funds, there may be what is called "capital gain distributions". Both dividends and capital gain distributions for the tax year must be reported on your daughter's return for 2006 if she is filing a return, no matter how much they are. You do not have to report the full amount of dividends from 1990. You should get a 1099DIV from the brokerage reporting 2006 dividends and capital gain distributions.