Gen Alpha: Tax Impacts and Strategies
- Viktoriya Barsukova, EA, MBA
- Jul 14
- 32 min read
Updated: Jul 19
By Jan Socha, CPA
NATP Tax Content Specialist
Every stage of life brings unique financial challenges and opportunities, shaped by age, family dynamics, and evolving tax considerations. In this special series, we follow the multi-generational Johnson family — spanning the Gen Alpha to the Silent Generation-as they navigate key life moments. Our first article in this series focuses on Gen Alpha and tax considerations for this generation.
Imagine a family that spans multiple generations. A generation can refer to a group of individuals who are born and live around the same time, typically spanning about 20 to 30 years, who share similar social,technological or cultural experiences,often defined by key events, innovations or shifts in societal norms during their formative years (cultural/social context). It can also include a group of individuals born and living at about the same time, linked through descent from parents to children and measured by age difference(biological/family context).
During 2025,our CPE articles will take a closer look at the Johnson family. The Johnsons are a hypothetical multigenerational family spanning from the Silent Generation to Gen Alpha (defined on the following page). These articles will provide insight into the unique tax challenges each family member faces based on their stage in life. We will start with the youngest,Gen Alpha,and finish with the oldest, the Silent Generation.
There is no appointed group that decides what each generation is called or when it begins or ends. Instead, various labels and cutoffs are suggested,and through a somewhat informal process, a general consensus emerges in media and everyday language. For our purposes, we will be using the generation ranges as used by the Generational Power Index
Note: Starting in 2025,a new generation, Gen Beta,came into existence and includes individuals born between 2025 and 2039. In some cases,a reference is made to the Greatest Generation, which includes individuals with a birth year range of 1901-1927,making the youngest member of this generation almost 100 years of age in 2025. For our purposes, we are including these individuals in the Silent Generation.
Example:the Johnson family
The Johnson family is an imaginary family that spans across multiple age groups. When filing their taxes, each family member faces distinct challenges, ranging from retirement distributions and contribuions to education and child tax credits. We will discuss some tax issues each generation may face and,when appropriate,tax planning ideas.
Each generation will be covered in its own article as follows:
February: Gen Alpha
April:Gen Z
June:Millennial
August: Gen X
October: Baby boomers
December: Silent Generation
Members of the Johnson family and their respective generations are as follows:
The Silent Generation: Robert Johnson, age 88,is retired and living off of his Social Security benefits,a small pension and distributions from his IRA. His spouse passed away several years ago, and Robert did not remarry. Robert is relatively healthy and owns his home.Robert and his wife have two children,Jeff and Jennifer.
Baby Boomers: Robert's son, Jeff, is married to Sandy,his high school sweetheart. Jeff, age 64, is working part time. Sandy, age 66, retired in 2024.The couple own their own home and are paying off the mortgage. Jeff is aiming to retire sometime in the next 18 months.The couple have two adult children,Sarah and James.
Gen X: Robert's daughter, Jennifer, age 50, is a divorced mother of two children, Ty and Ellie. Ty, her son, is in college and Ellie, her daughter,is in high school. Jennifer is a second-grade teacher. She also has a part-time job as a server at a local brewery that is owned by some of her co-workers. She currently receives child support from her ex-husband for her daughter.
Jeff and Sandy's daughter, Sarah, age 45, is married to Jason,age 48.Sarah and Jason work full time and have no children. The couple own their home and are paying off the mortgage.
Millennial: Jeff and Sandy's son, James, age 31, is a young professional,working full time. He started a side business doing freelance graphic design. James has student loan debt that he is slowly paying down. James is also a single dad to a toddler, Riley.
Gen Z: Jennifer's childreninclude her son, Ty,age 19,a sophomore in college, and her daughter, Ellie, age 16,a high school junior. Ty goes to college a couple of hours away from his hometown, and Ellie, who just got her driver's license, got her first part-time job as a lifeguard at the local pool.
Gen Alpha: James's daughter, Riley,age 3, goes to day care full time when James is at work. James has sole custody of Riley, as her mother is no longer in the picture.
Gen Alpha
Gen Alpha is generally defined as those born from 2013to 2024, and until 2025, it represented the youngest generation.In 2025, it will range in age from infant to 12years old. This generation is growing up in a world with a lot of digital integration, with technology and social media playing a constant role in their daily lives and development.
Because Gen Alpha is comprised of children and tweens,they are not directly invoIved in tax-related matters. However,tax-related issues affect their lives indirectly through their families.
Example:Riley
In the Johnson Family, Riley is Gen AIpha.Because she is three years old, she is generally too young to have a tax return filing requirement;however,Riley can still be part of the Johnson family's long-term taxplanning.In certain cases,she may have a tax return filing requirement.
In this article we will touch on some parental considerations, specifically the child tax credit (CTC)and the child and dependent care credit. Planning ideas for the child's future, specifically custodial accounts and education savings plans, will also be covered. We will end with a discussion on filing rules specific to children. This article is not all inclusive and only meant to highlight some items families may encounter.
CTC
The CTC is generally a nonrefundable personal credit that can only be claimed against the taxpayer's total regular tax liability. The regular tax liabiity is reduced by the allowable foreign tax credit, plus the taxpayer's alternative minimum tax (AMT) liability. Aportion of the credit is also refundable, subject to inflation adjusted limitations. This refundable portion is available to taxpayers who do not have enough tax liability to claim the full CTC.
A taxpayer may claim a $2,000 CTC for each qualifying child under the age of 17 and a $500 other dependent credit (ODC) for each dependent who is not a qualifying child for CTC purposes. The ODC can be claimed for a qualifying child who does not have a Social Security number (SSN). The total credit is phased out for single taxpayers whose modified adjusted gross income (MAGI)exceeds $200,000 ($400,000 for married taxpayers who file a joint return (MFJ)). Single taxpayers include filing status of single (S), head of household (HOH),qualified surviving spouse (QSS) and married filing separate (MFS). To claim the CTC for a qualifying child,the child's SSN must be included on the taxpayer's return (tax years 2018-2025). The SSN must have been issued before the due date for filing the return, including extensions. If the qualifying child does not have an SSN,the $500 ODC may be claimed for that child,using an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
Note: If a child was born and died in the same year and did not have an SSN,“Died"should be entered on the return instead of an SSN. A copy of the child's birth certificate,death certificate or hospital records must be attached to the tax return. The document must show that the child wvas born alive.
Below is a high-leve overview of the CTC and ODC.The information provided for tax years after 2025 are current as of the date this article was written. The CTC/ODC provisions in The Tax Cuts and Jobs Act (TCJA)will expire at the end of 2025, absent legislation by Congress.If Congress does not act, in 2026,the CTC will return to $1,000 per child and income thresholds will decrease.
CTC and ODC Overview
Divorced or Separated Parents
If the custodial parent releases the dependency claim to the noncustodial parent, both the Child Tax Credit (CTC) and the Other Dependent Credit (ODC) are also released to the noncustodial parent.
Eligibility
CTC: Available for children under age 17 who meet the IRS qualifying child requirements.
ODC: Available for dependents who do not qualify for the CTC, such as:
– Children under 19
– Full-time students under 24
– Disabled children of any age
– Qualifying relatives (as defined by IRS rules)
Credit Amount
CTC: $2,000 per qualifying child for tax years 2018–2025. After 2025, the credit drops to $1,000.
ODC: $500 per qualifying dependent for 2018–2025. This credit will no longer apply after 2025.
Refundability
CTC: Partially refundable. The refundable portion is known as the Additional Child Tax Credit (ACTC).
– To qualify, the taxpayer must earn over $2,500 ($3,000 after 2025).
– Maximum refundable amount is $1,700 per child (in 2024 and 2025).
– Total CTC + ACTC cannot exceed $2,000.
– After 2025, CTC and ACTC will both be limited to $1,000.
ODC: Not refundable. It can reduce tax liability but does not generate a refund.
Calculating the ACTC
The ACTC is generally the lesser of:
– The amount of credit that exceeds your tax liability
– 15% of your earned income over $2,500 ($3,000 after 2025)
Taxpayers with three or more children may calculate the ACTC using an alternate method based on Social Security taxes and Earned Income Credit (EIC).
Note: The IRS will not issue ACTC refunds before February 15 (calendar-year filers).
The IRS may also:
– Send a CP08 Notice if you qualify for ACTC but didn’t claim it
– Send Form 14815 requesting documents to support your CTC or ODC claim
More info: IRS CP08 Notice
Income Phase-Out Limits
CTC and ODC begin to phase out at the following Modified AGI (MAGI) thresholds:
For 2018–2025:
– $400,000 for Married Filing Jointly
– $200,000 for all other filers
After 2025:
– $110,000 for MFJ
– $75,000 for Single, HOH, QSS
– $55,000 for MFS
Other Notes
You cannot claim both the CTC (or ACTC) and the ODC for the same child in the same tax year.
References:
Planning item: For divorced couples,a qualifying child is generally a dependent of the custodial parentunless the custodial parent waives the dependency exception by signing a release (Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent). This release allows the noncustodial parent to claim the child as a dependent and claim the CTC/ODC for the child,assuming the requirements are met. If the custodial parent is not named in the divorce agreement,the IRS gives that status to the parent with whom the child spent more nights during the year. If custody was equal during the year,tie-breaker rules determine who is entitled to dependent-related benefits when the child could be a dependent on more than one return. In cases where custody for a child was split equally, the IRS will award custodial-parent status to the parent with
the higher adjusted gross income (AGI).Because the CTC/ODC is tied to the child's status as the taxpayer's dependent,divorced and separated parents may want to consider which one may treat the child as a dependent as the credit could be reduced or eliminated for the higher-income parent.
Example:divorced taxpayer
Phillip and Jennifer were divorced in 2020. Under the divorce decree,Jennifer was awarded custody of their two children. The divorce decree requires Jennifer to waive the dependency exemption to Phillip. In 2025,Phillip's MAGI is $250,000 and Jennifer's is $75,000.Because Phillip is allowed the dependency exemption,only Phillip is entitled to claim the CTC/ODC, even though the credit is phased out because of his income.
The following chart covers the definition of qualifying child for the CTC:
Qualifying Child – Child Tax Credit (CTC)
Age
The child must be under age 17 at the end of the tax year.
Example: A child born on January 15, 2008, turns 17 on January 15, 2025, and would not qualify for the CTC for tax year 2025.
Relationship
The child must be one of the following:
– Son or daughter (including adopted or legally placed for adoption)
– Stepchild or foster child
– Brother, sister, stepbrother, stepsister, half-brother, or half-sister
– Grandchild, niece, nephew, or any direct descendant of the above
Dependent Status
You must be able to claim the child as a dependent on your tax return.
The child cannot file a joint return unless it’s only to claim a refund of taxes withheld.
Note: While the personal exemption is suspended through 2025, the dependent definition still applies for the CTC.
Residency
The child must live with you for more than half of the year, with limited exceptions (e.g., in cases of divorce or separation).
Financial Support
The child must not have provided more than half of their own support during the year.
Citizenship
The child must be a U.S. citizen, U.S. national, or U.S. resident alien, and must have a valid Social Security Number (SSN).
Example:James and ACTC
For 2025 assume James reports $30,000 of taxable earned income and has Riley as his qualifying child.He has no income tax liability.Because James has no regular tax liability,there is no nonrefundable portion of the CTC.He may be entitled the ACTC (refundable portion). The following formula will be used as a starting point to calculate the ACTC:
Generally,the lesser of:
·The credit amount that exceeds the tax liability limit or
·15% of the amount by which the taxpayer's earned income exceeds $2,500 ($3,000 for tax years after 2025)
James'initial ACTC is the lesser of:
·$2,000(the amount of the credit that is disallowed by the tax liability limit) or
·$4,125((15%x($30,000-$2,500))
However,because the maximum ACTC for 2025 for any qualifying child cannot exceed $1,700,he will be entitled to an ACTC of $1,700.
Schedule 8812(Form 1040),Credit for Qualifying Children and Other Dependents, is used to figure the CTC (and ODC). The instructions include all applicable worksheets,and your software should contain those as well. The CTC is generally reported on Form 1040,U.S.Individual Income Tax Return, Line 19.The ACTC is reported on Form 1040, Line 28.
Scenario change: What would James's CTC and/or ACTC be if he reported earned taxable income of $30,000 and had a tax liability of $3,300?
In this scenario, he would be entitled to a CTC of $2,000,the smaller of the CTC ($2,000) or his tax liability ($3,300).He would not be entitled to an ACTC,as he has enough total regular tax liability to utilize the full $2,000 CTC.
ODC
For tax years beginning before 2026, a $500 ODC may be claimed for a dependent of a taxpayer who is the taxpayer's otherwise qualifying child who either lacks a SSN, is at least 17 years old or is the taxpayer's qualifying relative (see table on page 17 for a definition).Either way, the dependent must be a U.S. citizen,national or resident of the U.S. The ODC cannot be claimed for a dependent who is a resident of Mexico or Canada, but not a U.S. citizen or national.There is no age restriction like there is with the CTC;it can be claimed for a dependent of any age.
Schedule 8812 is used to calculate the ODC and the credit is reported on Form 1040,Line 19.
Example: ODC not eligible
Mark's 11-year-old nephew lives in Mexico and qualifies as Mark's dependent. The nephew is not a U.S.citizen,national or U.S. resident alien. Mark cannot claim the ODC for his nephew.
Qualifying Relative Tests [§152(d)]
To claim someone as a qualifying relative for tax purposes, all of the following conditions must be met:
Relationship or Household
The person must be either:
– A member of your family (e.g., parent, sibling, in-law, etc.)
or
– Someone who lived with you for the entire year as a member of your household.
Gross Income
The qualifying relative must have gross income below the IRS limit.
– For tax year 2025, that limit is less than $5,200
– For tax year 2024, the limit was less than $5,050
Support
You must have provided more than half of their total support during the tax year.
Not a Qualifying Child
The person cannot be claimed as a qualifying child by you or any other taxpayer.
Example: ODC eligible
Lila's son,Elliott, turned 17 on Dec. 30,2025, and is a citizen of the U.S. He can be claimed as a dependent on Lila's tax return.She cannot use Elliott to claim the CTC or the ACTC because he was not under the age of 17 at the end of 2025. Assuming all the other criteria are met,she can use him to claim the $500 ODC.
Child and dependent care credit (aka the dependent care credit)
An individual taxpayer may claim a nonrefundable credit for child and dependent care expenses if they have one or more qualifying individuals and incur employment-related expenses, which enables the taxpayer to be gainfully employed, look for work or attend school [§21(a)(1); Reg. §1.21-1(a)].Form 2441,Child and Dependent Care Credit, is used to calculate and claim the credit. The credit is reported on Schedule 3 (Form 1040), Additional Credits and Payments, Line 2, and Form 1040,U.S. Individual Income Tax Return, Line 20.
Qualifying individuals for this credit include a dependent child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than half of the tax year [§21].
Employment-related expenses for the credit are care expenses that allow the taxpayer (and spouse, if filing jointly) to work or look for work, and are for a qualifying person's care. These expenses are typically ones paid to day care centers,nannies or nurseryschools.Sleepaway camps and the cost of kindergarten (or above) do not qualify.
If the taxpayer does not find a job and has no earned income for the year,they cannot take the credit.Refer to the Child and Dependent Care Credit FAQs for additional information. The expenses are subject to an earned income limitation and must be reduced by amounts excluded from gross income under an employer's dependent care assistance program.
In addition to being work-related, the expenses must provide for the care of a qualifying person. Expenses qualify as providing care if their main purpose is the well-being and protection of a qualifying person.
Qualifying expenses are limited to the income the taxpayer or their spouse earns from work. Use the figure for whoever earns less. If one spouse has no earned income, there will be no credit. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled,that spouse is considered to have monthly income of $250 (if the couple has one qualifying child) or $500(two or more qualifying children).
The amount of the credit is a percentage of the amount of work-related expenses the taxpayer paid to a care provider for the care of a qualifying individual. The percentage depends on the taxpayer's AGI.The percentage can be found on Form 2441 and is 35% for AGI less than $15,000 and 20% for AGI over $43,000,with varying percentages based on AGI between those dollar amounts. There is no income ceiling on this credit;however,there must be earned income to qualify.
For 2025 (and 2024), taxpayers can claim a credit from 20% to 35% of their qualified dependent care expenses up to a maximum of $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.
Therefore, the maximum credit is $1,050 (35% x $3,000)for one qualifying individual and $2,100 (35% x $6,000)for two or more qualifying individuals. The $6,000expense limit does not need to be divided equally if there are two or more qualifying individuals.
The SSN of the children who receive the care must be included on the return. Without the SSN, there can be no credit.
Also, to claim the credit, a married couple must file a joint return. For these purposes, a valid same-sex marriage that is authorized under state or foreign law is accepted. A registered domestic partnership or a civil union is not. Also,include the caregiver's name,address and SSN (or tax ID number (TIN) if it is a day care or nursery school) on Form 2441.
According to the IRS,a taxpayer may still claim the child and dependent care credit if they are missing the provider's SSN or other identification number.The taxpayer must,however,demonstrate due diligence in attempting to secure this information. The IRS instructs the taxpayer to claim the child care expenses on Form 2441 and note the care provider's information that is available (such as name and address).Write “See Attached Statement" in the columns missing information.Explain on the attached statement that the taxpayer requested the provider's identifying number,but the provider did not give it to the taxpayer. This statement supports the use of due diligence in trying to secure the identifying information for the claim.
If the caregiver is a §501(c)(3) tax-exempt organization (religious,charitable,etc.) the name and address of the organization must be included on the return [§21(e)(9)(B)].This means the taxpayer does not need to include the TIN of a care provider that is a tax-exempt organization (i.e. YMCA day care);however,the taxpayer must write "tax exempt" in the space where the Form 2441 calls for the care provider's number.
Example:James
For tax year 2025,James pays $10,000 in employment-related expenses for the care of Riley while he is working.Assume James has earned income and AGI of $95,000.Riley is a qualified individual. The maximum James can take into account for purposes of determining the dependent care credit is $3,000. Based on his AGI,his dependent care credit is $600 (20% x $3,000).The $600 will reduce his tax liability.
Building on what was discussed earlier under the CTC section,he would also be entitled to a $2,000 CTC,reducing his tax liability even more.
Scenario change
What if James had qualified employment-related expenses of $3,000 for Riley but he had earned income and an AGI of $2,000?
He would only be able to take into account $2,000 of his employment-related expenses when computing his dependent care credit. Because his AGI is less than $15,000,a dependent care credit of $700 (35% x $2,000)is calculated. At an AGI of $2,000, he would not have tax liability, therefore, he would not receive the credit.
Would he be allowed to take the CTC or the ACTC?No,James would not be able to claim either, as he does not have the necessary income to claim them. There is an earned income requirement of at least $2,500 for the ACTC.
FSA
If the taxpayer's employer offers a dependent care flexible spending account (FSA) they could consider participating in the FSA. Under the FSA, the taxpayer may be able to contribute up to $5,000 ($2,500 MFS)per year on a pre-tax basis. This money is withheld from the taxpayer's paycheck by their employer and placed with a plan administrator in a non-interest bearing account. As dependent care costs are incurred,the taxpayer submits a statement with the plan administrator substantiating the costs and receives reimbursement.In addition to saving federal income tax, participating in the FSA will save the taxpayer Federal Insurance Contributions Act (FICA) taxes. An employer reports these benefits on Form W-2, Wage and Tax Statement,Box 10. If the taxpayer received these benefits as a partner, the amount excluded from gross income should be shown on Schedule K-1 (Form 1065),Partner's Share of Income, Deductions, Credits, Etc., Box 13,Code O (based on Partner's Instructions for Schedule K-1 (Form 1065) (2023)).
Dependent care benefits excluded from income will have an impact on the dependent care credit. It will reduce the work-related expenses and the dollar limit of the work-related expenses. This means that if the taxpayer participates in the FSA program and receives tax-free benefits, the dollar limits ($3,000 or $6,000) are reduced by the excludable amount received.
Example:James and FSA
For tax year 2025,James pays $10,000 in employment-related expenses for the care of Riley while he is working. Riley is a qualified individual. He contributes $5,000 to an employer offered FSA. Assume James has earned income and an AGI of $90,000. The maximum James can take into account for purposes of determining the dependent care credit is $0 ($3,000-$5,000).He would not have a dependent care credit. He wouldstill have a CTC of $2,000.
When does it make sense for a taxpayer to contribute to an FSA? If a taxpayer's marginal tax rate (tax rate paid on the highest dollar of taxable income) is more than 15%,participating in the FSA is more valuable than taking the dependent care credit. The income excluded from income
under the FSA results in a tax benefit at the taxpayer's highest rate. The dependent care credit rate is 20% for taxpayers with an AGI over $43,000. Taxpayersalso save up to 7.65% on FICA taxes. Therefore, assuming a marginal tax rate of 15% and a FICA rate of 7.65%,the total effective tax savings is 22.65%((15%+7.65%).(For simplicity, we assumed no state income tax rate).
Using a filing status of HOH, James has an estimated 22% marginal tax rate based on the 2025 tax tables.By utilizing his employer's FSA,he will save approximately $1,100[($5,000x.22) or $10,000-$8,900)] in federal tax.Doing a side-by-side comparison,we can see it makes more sense for him to utilize his employer's FSA benefit. In this scenario, his total tax savings is $500($7,400-$6,900). This is a high-level comparisonand greater tax savings would result if the FICA and state taxes were factored in.
Comparison: No FSA Contribution vs. FSA Contribution (James)
Earned Income:
– No FSA Contribution: $95,000
– With FSA Contribution: $90,000
Adjusted Gross Income (AGI):
– No FSA Contribution: $95,000
– With FSA Contribution: $90,000
Dependent Care Paid:
– In both cases: $10,000
Qualified Expenses for Dependent Care Credit:
– No FSA Contribution: $3,000
– With FSA Contribution: $0
Dependent Care Credit:
– No FSA Contribution: $600
– With FSA Contribution: $0
Estimated Tax Before Credits:
– No FSA Contribution: $10,000
– With FSA Contribution: $8,900
Child Tax Credit (CTC):
– Both cases: $2,000
Dependent Care Credit (again applied as a credit):
– No FSA Contribution: $600
– With FSA Contribution: $0
Final Tax After Credits:
– No FSA Contribution: $7,400
– With FSA Contribution: $6,900
Paying family members
What if James decides he would like to pay his mother instead of a day care to take care of his daughter while he is working? Would these payments be considered qualified childcare expenses?
Facts and circumstances will dictate, but generally yes.they would be considered qualified child care expenses.Payments to a taxpayer's relative or household members will not qualify if the person being paid is a dependent (under §151(c)) of the taxpayer or the spouse, a child of the taxpayer (under §152(f)(1)) under age 19 at the end of the year, the taxpayer's spouse or the parent of taxpayer's child who is a qualifying individual [§21(e)(6);Reg,§1,21-4(a)].
Depending on if the family member is the taxpayer's employee or an independent contractor (self-employed)will determine who is responsible for paying employment taxes on these payments.
In general, taxpayers have household employees when they hire an individual to do household work,and the taxpayer controls the work the individual does and how it is completed. However, if the individual controls how the work is completed, then the individual is not a household employee. Instead, the individual is self-employed.Household work includes babysitting and caregiving. Taxpayers with household employees must obtain an employer identification number (EIN)and issue Form W-2 to their employees when Social Security and Medicare wages of $2,800 in 2025($2,700 in 2024) or more are paid to the employee, or if the taxpayer withholds federal income tax from the employee's wages. Also,household employers may be subject to other employment taxes for their employees such as state withholding and state unemployment tax.Refer to Schedule H,Household Employment Taxes,for additional information.
We will now discuss some early tax considerations for the youngest family member,Riley.With the cost of higher education rising astronomically, many families are attempting to save early for these expenses. Funding these costs could include the use of custodial accounts or 529 plans.
Custodial accounts
Developed in 1956 and adopted in some form in all 50 states, the Uniform Gifts to Minors Act (UGMA)allows parents and grandparents (or anyone) to transfer assets to a custodian for the benefit of a minor child.The UGMA account is a type of custodial account that is created to hold and protect assets for a minor until they reach a specified age, generally 18 or 21,depending on the state. Initially, UGMA custodial accounts were not allowed to hold real estate and other types of investments.
In 1983,The Uniform Transfer to Minors Act (UTMA)was created in many states to allow a custodial account to hold real estate, limited partnership units and other investments. UTMA accounts will generally end at age 21,with some states allowing termination at age 25. In states allowing termination at age 25,the money contributed to the account is most likely not considered a gift of a present interest and, therefore, is not eligible for the annual gift exclusion [§2503(c)], In 2025, the annual
gift exclusion is $19,000 and $38,000 for joint gifts (for 2024,$18,000 and $36,000 for joint gifts). In some states the UGMA has been replaced by the UTMA.
Both the UTMA and UGMA accounts are custodial accounts that provide a way to transfer assets to minors Generally, the annual gift tax exclusion is available,even though the child's enjoyment of the assets is delayed,provided the child receives the asset at age 21 or one of the exceptions is met [Reg. §25.2503-41UTMA and UGMA accounts are generally used for a relatively small gift. In cases of larger gifts, a trust is generally recommended.Due to the long-term nature and potential complexities of custodial accounts,consulting and working with a financial or other professional skilled in this area is recommended when a client has an interest in establishing a UGMA/UTMA custodial account.
Tax concerns
A transfer under UGMA/UTMA is treated as a gift in trust for generation-skipping transfer tax (GSTT) purposes [Reg.§26.2652-1(b)(2),Ex.1].However,these transfers should generally meet the requirements for the GSTT annual exclusion. The GSTT annual exclusion allows a transfer up to the annual gift tax exclusion amount.
Note: The term “treated as a gift in trust for GSTT purposes" generally refers to how a gift is handled under the GSTT rules. The GSTT is a federal tax on transfers of property (gifts) that “skip” a generation,such as from a grandparent to a grandchild,bypassing the parent.When a gift is given in trust, instead of the donor(giver)giving it directly to the recipient, the donor places the gift in a trust. For GSTT purposes, gifts in trusts are looked at as they may be subject to the GSTT.However.for UGMA/UTMA accounts,a gift from a grandparent to a grandchild is not generally subject to the GSTT and qualifies for the $18,000 ($36,000 for joint gifts) annual gift exclusion for 2025.
From a tax perspective, income earned on UGMA/UTMA accounts are generally taxable to the child.No fiduciary (trust) income tax return is required.However.if the beneficiary of the account is under the age of 19.the kiddie tax rules will apply (see "note" in the "specific rules for children" section later in the article for a brief discussion on the kiddie tax on page 24). However, if a donor's legal obligation to support a minor child is satisfied with income from the UGMA/UTMA account.the donor must recognize the income (regardless of who the custodian is) under the granter trust rules [§677(b)].
Example: custodial account and unearned income
Riley has a custodial account set up by her grandfather to give her a financial head start. The account receives qualified dividends on stock held in the account. Riley's investment income, which is unearned income, includes dividends. Depending on the dollar amount of unearned income,she may be subject to the kiddie tax.
Riley's uneared income includes income produced by property given to her as a gift; not only from her parents,but also from any other source like her grandparents.It also includes income from property given as a gift to her made under the UGMA, whether or not that income is distributed to her [Reg. §1.1(i)-1T,Q&A 8 and 15].Investments potentially subject to the kiddie tax include U.S.savings bonds, taxable interest-bearing bank accounts and shares of stock.
Another issue tax professionals need to be aware of is the potential for these transfers to be included in the donor's gross estate. UGMA/UTMA transfers will be included in the donor's gross estate for estate purposes if the donor dies while serving as custodian [§2036;§2038].See Rev.Rul. 59-357, amplified by Rev. Rul.70-348,for additional guidance. Under §2038,the custodial powers are a retained power to alter, amend or revoke the transfer,causing the property to be included in the donor's gross estate. This risk can be avoided if the donor does not name themselves as custodian of the UGMA/UTMA account.However,many parents will see this risk as mninor and one they are willing to take as they want to maintain parental control of the fund and how it is invested.
In situations where gift-splitting is elected (where a separate property gift is treated as made half by each spouse), the property is not included in the consenting spouse's estate if that spouse dies while acting as custodian [Rev. Rul. 74-556].
Example: UGMA/UTMA not included in estate In 2025,Eric contributes $38,000 of his separately owned securities to a UGMA/UTMA for the benefit of his daughter,Alex. Sally,Eric's spouse,consents to gift-splitting. The entire $38,000 is eligible for the annual gift tax limit and a gift tax return does not need to be filed.
Eric initially named himself custodian of the account.He later resigned and appointed Sally as the successor custodian. Sally died while serving in thiscapacity.
Sally was not the actual donor of the funds transferred to the UGMA/UTMA account; therefore, no part of its value is includable in her gross estate.This is correct even though she was a deemed donor for gift-splitting purposes.
Education savings plans
Qualified tuition programs (QTPs) or 529 plans (named after §529) are tax-advantaged accounts that allow parents, grandparents and others to help fund a child's college,K-12 tuition,or eligible vocational schools and apprenticeship programs. There are two types of programs. The first is a prepaid plan (aka prepaid tuition program), which allows someone to buy tuition credits or certificates at present tuition rates, even though the child (beneficiary) will not be starting college for some time.The second type.savings plans (aka college savings plans),depends on the investment performance of the fund(s) contributions are placed in.
Contributions to 529 plans for any designated beneficiary cannot exceed the total amount needed to cover the beneficiary's qualified education expenses at an eligible educational institution. A school should know if they are an eligible institution;however,essentially all accredited public,nonprofit and proprietary post-secondary institutions qualify. Contributions to the 529 plan are not deductible for federal tax purposes; however,some states allow for potential deductions.
The account owner can change designated beneficiaries or roll over the funds in the program to another plan for the same or different beneficiary who is a member of the previous beneficiary's family without income tax consequences [§529(c)(3)(C)]. A change in beneficiary or a rollover to the account of a new beneficiary may be subject to gift tax [§529(c)(5)(B)]. It is also subject to the GSTT if the new beneficiary belongs to a generation that is two or more levels below the generation of the existing beneficiary. Also,only one rollover per beneficiary is allowed in a 12-month period [Notice 2024-23,Sec.II,2024-7 IRB].
Contributions made to 529 plans are considered gifts to the child (student); however,they do qualify for the gift tax exclusion amount ($19,000 for 2025; $18,000 for 2024). If a donor's contributions in a year exceed the exclusion amount,they can elect to take the contribution into account ratably over a five-year period starting with the year of the contribution. Assuming someone makes no other gifts to the beneficiary,they could contribute $95,000 ($19,000 x 5) per beneficiary in 2025($90,000 in 2024) without gift tax. If the donor makes any additional contributions during the next four years, they would be subject to gift tax,except to the extent the exclusion amount increases. If a taxpayer was married,they together could contribute $190,000 (S95 000 x 2)per beneficiary for 2025($180,000 for 2024),subject to any contribution limits the plan may impose. The election to take the excess contributions ratably over five years is made on Form 709,United States Gift (and Generation-Skipping Transfer) Tax Return, for the year of the contribution. The 'Item B' box on Schedule A (Form 709), Computation of Taxable Gifts,should be marked.If, in any of the four years following the election,the donor is not required to file a Form 709other than to report that year's portion of the election,the donor does not need to file or otherwise report that year's portion [Instructions to Form 709,(2023),p.8].
Note:Gifting more than the exemption amount to someone does not automatically mean the donor owes gift tax; however,a gift tax return will be required to be filed.
Example:529 gifting
In 2024,when the annual exclusion amount was $18,000,Robert made a contribution of $97,500 to a 529plan for Riley's benefit. Robert could make an election for only a portion of the contribution that did not exceed $90,000 ($18,000 x 5). The $7,500 ($97,500-$90,000)is treated as a taxable gift by Robert in 2024 [Prop Reg.§1.529-5(b)(2)(v)].
In 2025,when the annual exclusion amount is $19,000.Robert makes an additional contribution of $6,000 for Riley's benefit. Robert is treated as making an excludable gift of $1,000 (the amount of the increase in the gift tax exclusion amount) under the annual exclusion rules.The remaining $5,000($6,000-$1,000) would be a taxable gift in 2025 [Prop Reg. §1.529-5(b)(2)(v)].
Distributions from a 529 plan account may be excluded from the designated beneficiary's gross income up to the amount of the student's qualified higher educatio expenses.These expenses include fees,books,supplies and required equipment.Reasonable room and board is also included if the student is enrolled at least half-time. Up to $10,000 per student per year in tuition for elementary or secondary public,private.or religious school is included in qualified higher education expenses. Also included is up to $10,000 for student loan repayments of the designated beneficiary or sibling.
Distributions in excess of the beneficiary's qualified higher education expenses are includible in their gross income and generally subject to a 10% additional tax.
Also,starting in 2024,direct trustee-to-trustee rollovers can be made from a long-term (15 years or more)QTP plan to a Roth IRA with the same designated beneficiary, subject to annual and lifetime limitations [§529(c)(3)(E)]. The lifetime total is $35,000. Annually,the rollover amount is subject to Roth IRA contribution limits, and contributions (including earnings) within the last five years are ineligible for the rollover. The Roth IRA owner must have taxable income at least equal to the amount of the rollover. The rollover is not limited based on a taxpayer's AGI, which means those with income exceeding Roth IRA contribution income limits are eligible to participate. Currently (2025 and 2024),the Roth IRA contribution limit is $7,000 ($8,000 for those age 50 and over).
Custodial accounts vs. 529 Plans
Below is a comparison of UGMA/UTMA accounts versus 529 plans. The comparison highlights that,while UGMA/UTMA accounts offer greater flexibility,529 plans are more tax efficient for education-specific savings. They also offer financial aid advantages and beneficiary flexibility. Some of this information was obtained from Savingforcollege.com(https://www.savingforcollege.com/article/differences-between-ugma-and-utma-accounts-and-529-plans).
UGMA/UTMA Account vs. 529 Plan
Ownership and Control
– UGMA/UTMA Account: The account is held as the minor’s property, with a custodian managing it until the child reaches adulthood. Ownership legally transfers to the child at the time of the gift.
– 529 Plan: The account owner—usually a parent—retains control over the account and its investments.
Tax Treatment
– UGMA/UTMA Account: Earnings are taxed annually. Some of the income may be taxed at the child’s rate under the kiddie tax rules.
– 529 Plan: Earnings grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses. Nonqualified withdrawals are subject to income tax and a 10% penalty on earnings. Some states also offer tax benefits for contributions.
Financial Aid Impact
– UGMA/UTMA Account: Considered a child’s asset on the FAFSA, which may reduce aid eligibility by up to 20% of the account value.
– 529 Plan: Considered a parent asset on the FAFSA, with a smaller impact on aid—typically up to 5.64% of the account value.
Beneficiary Flexibility
– UGMA/UTMA Account: The named beneficiary is fixed and cannot be changed.
– 529 Plan: The beneficiary can be changed to another family member, offering flexibility to support multiple children or relatives.
Contribution Limits
– UGMA/UTMA Account: No annual contribution limit, but gifts are subject to annual gift tax exclusion rules.
– 529 Plan: No annual contribution cap, but lifetime limits range from $235,000 to over $550,000, depending on the state. Contributions still follow the annual gift tax exclusion.
Investment Options
– UGMA/UTMA Account: Offers broad investment choices, including stocks, bonds, mutual funds, ETFs, and real estate (for UTMA accounts).
– 529 Plan: Investment options are limited to the plan’s offerings, such as mutual funds, age-based portfolios, money market funds, and FDIC-insured accounts.
Permitted Uses
– UGMA/UTMA Account: Funds can be used for any purpose that benefits the child, not just education.
– 529 Plan: Funds must be used for qualified education expenses to remain tax-free. This includes up to $10,000/year in K–12 tuition, college costs, computers, internet, special needs expenses, and up to $10,000 in student loan payments per beneficiary.
If eligibility is met, up to $35,000 from a 529 plan can be transferred to a Roth IRA for the beneficiary.
Specific rules forchildren
Generally,a child computes their income tax liability in the same manner as an adult taxpayer. The child is normally responsible for filing their own tax return and for paying any tax (including interest or penalties) on the return. However, if a child (or other individual)can be claimed as a dependent, they are subject to diferent filing thresholds based on earned or unearned income for the year.
A dependent (single, under age 65, and not blind) must file a tax return when the following requirements are met:
Tax Return Filing Requirements for Most Minor Dependents
Tax Year 2025
– Unearned income: Filing is required if over $1,350
– Earned income: Filing is required if over $15,000
– Gross income: Filing is required if more than the larger of:
• $1,350, or
• Earned income (up to $14,550) plus $450
Tax Year 2024
– Unearned income: Filing is required if over $1,300
– Earned income: Filing is required if over $14,600
– Gross income: Filing is required if more than the larger of:
• $1,300, or
• Earned income (up to $14,150) plus $450
Earned income of a dependent includes salaries,wages,tips,professional fees and other income received from performing personal services. Unearned income includes investment-type income (taxable interest,ordinary dividends, capital gain distributions, etc.),unemployment compensation,taxable Social Security benefits,pensions,annuities and distributions of unearned income from a trust. Gross income is earned income plus unearned income.
In addition, a dependent is required to file a tax return in certain situations, including if they have net earnings from self-employment of $400 or more or if the dependent received wages for which the employer did not withhold Social Security and Medicare taxes.
Example: minor filing requirement
Riley is 3 years old and not blind. She can be claimed as a dependent on her dad's tax return. During 2025 Riley received $1,790 of taxable interest and dividend income.She did not have any earned income. Riley must file a tax return because she had unearned income only and her gross income is more than $1,350.
If James, Riley's dad, is eligible, he could elect to report Riley's income on his return, and Riley would not have a filing requirement. In some cases, the parent may be paying more tax if they make the election because the income may be taxed at a higher rate.However,the cost of tax preparation for the child could negate the additional tax.
A parent of a child who is subject to the kiddie tax may be able to include the child's investment income on the parent's return. If the parent makes this election, the child does not have to file a tax return and is treated as having no gross income for the year. This election is made annually by filing Form 8814,Parent's Election to Report Child's Interest and Dividends, with the parent's timely filed return, including extensions. A separate Form 8814 will need to be filed for each child. Refer to the instructions for Form 8814 for additional guidance.
Note: A child with investment income (unearned income) may be subject to the kiddie tax on their unearned income if certain requirements are met. When the kiddie tax is imposed, the child's taxable income attributable to earned income is taxed under the rates for single individuals, and the child's taxable income attributable to net unearned income is taxed according to the parents' rates if higher than the child's rates.For 2025, the kiddie tax rules apply when a child has unearned income of more than $2,700 ($2,600 in 2024).
When the kiddie tax applies, Form 8615, Tax for Certain Children Who have Unearned Income,needs to be filed with their return. Worksheets will need to be utilized to calculate the tax.For additional information,refer to the instructions for Form 8615. The kiddie tax will usually occur when high-income parents invest their money under their children's name in hopes of having high earnings taxed at the child's lower tax rate instead of their own higher tax rate or when the child receives a large inheritance or settlement that results in large amounts of unearned income.
When a child is subject tothe kiddie tax, for 2025,the first $1,350 of unearned income is not taxed because it is covered by the child's standard deduction. The next $1,350 is taxed at the child's marginal tax rate. Anything above $2,700 is taxed at the parents' marginal rate.Generally, the kiddie tax will not apply beginning on Jan. 1 of the earlier of (1) the first year that the child is at least 19 years old by the end of that year and is not a full-time student during that year, or (2) the year that the child turns 24 years old.
Example:kiddie tax
Ellie,age 16,received $3,000 in interest during the year from a bank account. Some of the money in the account was money she earned from her job as a lifeguard. The balance came from cash gifts given to her by relatives over the years. The entire amount of interest from the bank account is subject to the kiddie tax rules [Reg. §1.1(i)-1T,Q&A,Ex(5)].
The kiddie tax rules apply regardless of the source of assets giving rise o Ellie's unearned income and regardless of when those assets were transferred to her [Reg. §1.1(i)-IT,Q&A, Ex. (8) and(9)].To reduce or eliminate her investment income that exceeds $2,700
(for 2025), investments that produce little or no taxable income could be considered. Working with a financial advisor is recommended unless the practitioner is licensed in that area.
Minor's return
A minor's return must be made by the minor, o it can be made for the mninor by a guardian or a person charged with the care of the minor or the minor's property [Reg.§1.6012-1(a)(4)].Guardians or fiduciaries should file returns for minors and others who are incapable of filing their own return, unless a minor makes their own return [Reg.§1.6012-3(b)(3)].
Signing a minor's return
If a child is unable to sign their own return, for example,due to age, their parent or guardian must do so. The parent or guardian should sign the child's tax return with the child's name followed by: “By (signature) Parent or guardian for the minor child” [Rev. Rul. 82-206, 1982-2CB 356].
IRS issue
If a child, or the parent or guardian of a child,receives an IRS notice concerning the child's tax return or tax liability,the IRS should be informed immediately that the notice concerns a child. The IRS then may make a special effort to solve questions or problems that stem from the child's return with the parent or guardian of the child. The usual collection efforts by the IRS are typically suspended pending an outcome of the issue.
A child, or parent or guardian who signs a tax return on a child's behalf, may deal with the IRS on all matters relating to that return. A parent or guardian who does not sign the return may provide the IRS with information concerning the return and pay the child's tax; they,however,are not able to receive information or otherwise deal with the IRS unless a signed Form 8821,Tax Information Authorization, is completed.Form 8821 entitles the parent or guardian to receive notices and information concerning the child's return.Form 8821 may not legally bind the child regarding tax liability unless authorized to do so by state law in which the child lives.
Alternatively, a child's parent or guardian who does not sign the child's return may be authorized as a third-party designee to discuss processing the return with the IRS as well as provide information concerning the return.The “Yes”box in the “Third-Party Designee" area of the tax
return should be checked by the child or person signing the return on the child's behalf, and the designee's name, phone number and personal identification number (PTIN) should be entered.
If designated, the parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. The designated individual cannot receive any refund check, bind the child to any tax liability or otherwise represent the child before the IRS. This authorization will automatically end no later than the due date (excluding extensions) for filing their tax return. This is April 15,2025,for most people filing a 2024 return.
A parent or guardian who doesn't sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf.Form 2848,Power of Attorney and Declaration of Representative, is used to designate a child's representative. If designated, a parent or guardian can receive information about the child's return but can't legally bind the child to a tax liability unless authorized to do so by state law in which the child lives.
Child's earnings
For federal income tax purposes, amounts a child earns by performing services are included in the child's gross income and not the gross income of the parent [§73(a);Reg.§1.73-1]. This is true even if, under state law,the parent has the right to the earnings and may actually have received them [Reg. §1.73-1(a)].
Several court cases affirmed this. In one case, it was determined that it was improper for the minor child's parents to include on their joint return the income and expenses attributable to the child's employment as a model and actress [Charlie Daniel Turner, Jr., et ux.v.Comm'r, TC Summary Opinion 2003-6]. In another case,the $70,000 bonus paid to Richie Allen,a minor,for signing to play with the Philadelphia Phillies was taxable to him even though $40,000 was paid to his mother [Allen v. Comm'r, 50 T.C. 466].
In conclusion,a tax professional can help navigate the complexities of topics such as the CTC and dependent care credit as well as provide ongoing guidance with tools such as 529 plans and custodial accounts. Over the years, the guidance provided will assist families in making informed decisions and adopting to tax law changes. The support of a dedicated tax professional becomes an invaluable resource to each member of the family,includng the youngest one.
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