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We opened a UTMA account for my son many years ago. He's 15…

We opened a UTMA account...
We opened a UTMA account for my son many years ago. He's 15 now. Are we allowed to use those funds to purchase a vehicle for him?
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Answered in 8 minutes by:
3/11/2018
Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 33,122
Experience: Personal Investment, Tax Preparation
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Funds in UTMA account belongs to your son.

All income generated in this account is HIS taxable income.

Because he is a minor - he are not eligible to manage the account by himself.

So parents are acting as custodians - and manage the money on your behalf.

Whatever you think is appropriate - you may do.

There is no limitations to use funds to purchase a vehicle for him- you are perfectly fine.

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Customer reply replied 4 months ago
Ok great. So, we had it invested in some stock. In the past 15 years it has generated about $2,500. (Original gift was $5,000). So, if we use all $7,500 of it to purchase a car, you're saying that we'll need to pay taxes only on the $2,500?

We need to have more clarification...

$5000 was your original basis - when stocks were purchased.

I assumed stocks were never been sold during these years.

If over these years - stocks paid dividends - these dividends were taxable for your son but because of small amount - he was not required to file.

These dividends if reinvested are ADDED to your original basis.

When you sell stocks - the gain will be calculated as

$7,500(selling price) MINUS (adjusted basis)

That adjusted basis will be taxable income for your so - not for you.

You will receive a reporting form 1099B for that sale.

You will need to prepare the tax return for your son and calculate the tax liability.

But based on your information - that may be minimal.

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Customer reply replied 4 months ago
Sorry, let me clarify. My paternal grandmother passed away around 2005. My father and his siblings were the beneficiaries of her estate. They gifted each of my kids $5,000 worth of bank stock (not cash). This was immediately placed into a UTMA account for each of them.I have declared the dividends every year on MY tax return. The value of the stock did not change very much at all this entire time, so the $2,500 increase in the UTMA account was primarily in dividends reinvested in the stock. (so I don't know if I've been paying taxes on those dividends or not, but I did receive the tax forms and included them in my tax returns each year).Then, about two years ago I sold the stock because it was traded VERY little (many days, zero shares were traded) and I was concerned that I wouldn't be able to get rid of it when I needed to. The money remained in the UTMA accounts...obviously no dividends anymore, so the value has not increased since then.My understanding has always been that because my kids are minors, they don't have their own tax returns. I declare them as dependents every year.So, have I done anything wrong and what happens now?

You wrote - I have declared the dividends every year on MY tax return.

If that was the UTMA account for your son - the tax form reporting dividends should be issued in your son's name and under his SSN.

So I assume that amount was NOT included into your income.

But you may choose instead on filing separate tax return for your son to include that reported with your tax return.

Then you wrote - about two years ago I sold the stock

That was a sale transaction - and in general should be reported on the ax return for THAT tax year - but again - that might be taxable income for your son - not for you.

The money remained in the UTMA accounts - for tax purposes - that makes NO difference whether funds are remained in the account or not.

My understanding has always been that because my kids are minors, they don't have their own tax returns. - that might be true or not... minors sometimes have to file tax returns and sometimes have tax liability.

But when income is below certain threshold - filing is not required.

I declare them as dependents every year. - that is OK because their income was very little.

.

So, have I done anything wrong and what happens now?

We need to verify if you mistakenly included that income into your own - if yes that was a mistake.

Then - we need to verify if that resulted larger tax liability - but most likely not or a very little.

In any case - you will need to know the total amount of all reinvested dividends - but that is needed to report the sale transaction two years ago.

If you have cash in the account - and just taking the money out - nothing is taxable in the current year.

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Customer reply replied 4 months ago
Wow, this is mind numbing. I just followed TurboTax each year. I always reported all of the tax forms sent to me by fidelity. The software would ask me questions and it calculated everything for me. I told it my kids ages, UTMA accounts, I entered my stock sale transaction, etc.
Customer reply replied 4 months ago
Was that a mistake trusting turbotax?

If you want me to verify your filing - I need to see your tax return.

It is possible that you choose correctly.

But without seeing your tax return - I may not make such conclusion.

Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 33,122
Experience: Personal Investment, Tax Preparation
Verified
Lev and 87 other Finance Specialists are ready to help you
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Customer reply replied 4 months ago
Thanks for your help, I won't ask you to go through that effort.
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