Do You Pay Taxes on a Custodial Account? A Parent's Guide

Short answer: yes, a 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 it works.

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.

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

Do you have to pay taxes on a custodial account?

Yes, but it's the child's tax and usually small for modest balances. The account's unearned income — dividends, interest, and realized capital gains — is taxed to the child under the kiddie-tax rules.

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.

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.

Who files the tax return for a custodial account?

If the child's unearned income crosses the threshold, either the child files their own return (Form 8615) or the parents report the income on their return (Form 8814). A tax preparer can advise which is better.

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.