UTMA Taxes: Do You Pay Tax on a Custodial Account?

Short answer: yes, a UTMA/UGMA custodial account can owe taxes — but it’s the child’s tax, not yours, and for most families with modest balances the bill is small or zero. Here’s exactly how UTMA taxes work.

How are UTMA accounts taxed? The overview

A UTMA is a taxable account, so it’s taxed each year on the income it generates — not on its balance. Three pieces decide the bill, and each has its own deep-dive:

• The kiddie tax sets the rate on the account’s investment income — see The Kiddie Tax, Explained.
• Capital gains apply when you sell — and there’s a way to reset cost basis at a 0% rate, covered in Tax-Gain Harvesting in a UTMA.
• Contributions are gifts, which brings in the annual exclusion and gift tax — see Gift Tax and Custodial Accounts.

The rest of this page walks through each piece in plain English.

Whose income is it? The child’s

The money in a custodial account (a UTMA/UGMA) legally belongs to the kid from day one. So any taxable income the account throws off is taxed to the child, under the “kiddie tax” rules.

What actually gets taxed (and what doesn’t)

You’re taxed on the account’s unearned income — not on the balance itself. That means:

• Taxable: dividends, interest, and capital gains you actually realize by selling.
• Not taxable (yet): gains on investments you simply keep holding. Growth isn’t taxed until you sell.

The 2026 thresholds

For the 2026 tax year, a child’s unearned income is taxed in three tiers:

• The first $1,350 is tax-free.
• The next $1,350 is taxed at the child’s (usually low) rate.
• Anything above $2,700 is taxed at the parent’s marginal rate.

So a custodial account earning a few hundred dollars of dividends a year usually owes little or nothing. It’s only once the account is large enough to generate real income that the tax becomes meaningful.

The paperwork

• The brokerage sends a 1099 each year listing the dividends, interest, and any sales.
• If the child’s unearned income crosses the threshold, a return gets filed — either the child’s own (Form 8615) or, in some cases, the income is reported on the parents’ return (Form 8814).
• Which path is better depends on the numbers, so it’s worth running past a tax preparer.

What about contributions and withdrawals?

Two things people expect to be taxed but generally aren’t:

• Putting money in. Contributions to a UTMA are gifts to the child. There’s no income tax on a contribution, though large gifts interact with the annual gift-tax exclusion — the full picture is in Gift Tax and Custodial Accounts.
• Taking money out. A UTMA withdrawal isn’t a separate taxable event — the tax was already handled each year on the income the account generated. What matters is that the money is spent for the child’s benefit, since the funds legally belong to them.

Roth and 529 accounts are different

A custodial Roth IRA and a 529 don’t work like a taxable custodial account — they grow tax-advantaged, so the annual kiddie-tax math above doesn’t apply to them. If minimizing yearly taxes matters to you, that difference is a big part of choosing the right wrapper.

This is general education, not tax advice. In any year the account generates real income, confirm the filing details and current thresholds with a tax preparer.

Frequently asked questions

How are UTMA accounts taxed?

A UTMA is a taxable account, taxed each year on the income it generates — dividends, interest, and realized capital gains — not on its balance. That income is the child's and is taxed under the kiddie-tax rules.

Who pays taxes on a UTMA account?

The child does, not the parent. The money legally belongs to the child, so the account's unearned income is taxed to them — though above a threshold some of it is taxed at the parent's marginal rate under the kiddie tax.

How much can a custodial account earn before it's taxed?

For 2026, the first $1,350 of a child's unearned income is tax-free, the next $1,350 is taxed at the child's rate, and amounts above $2,700 are taxed at the parent's marginal rate.

Are UTMA dividends and interest taxable?

Yes. Dividends and interest are realized income, so they're taxable each year even if you reinvest them. Only unrealized growth on investments you keep holding is untaxed until you sell.

How are UTMA capital gains taxed?

Capital gains are taxed only when you sell, at the child's rate up to the kiddie-tax threshold. Some families deliberately realize long-term gains each year to reset cost basis at a 0% rate — see the tax-gain harvesting guide.

Do you pay taxes when you withdraw from a UTMA?

A withdrawal isn't a separate taxable event — tax is handled each year on the income the account generates. The main rule is that withdrawals must be for the child's benefit, since the money is legally theirs.

How do I report a UTMA on my taxes?

The brokerage issues a 1099 listing dividends, interest, and sales. If the child's unearned income crosses the threshold, either the child files their own return (Form 8615) or the parents report it on theirs (Form 8814).

Does a custodial account get taxed if you don't sell anything?

Growth alone isn't taxed — only realized income is. Dividends and interest are taxable each year, but gains on investments you keep holding aren't taxed until you sell them.

Are custodial Roth IRAs and 529s taxed the same way?

No. A custodial Roth IRA and a 529 grow tax-advantaged, so the annual kiddie-tax treatment that applies to a taxable UTMA doesn't apply to them.