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My kids (minors) each received a gift of some stock from my wife's parents last year. The stock is in the kids' names, with my wife listed as the custodian. They each made just slightly over $100 in dividends last year, and have no other income. No income tax was withheld. They each received a 1099-DIV form.

Are they required to file a tax return and pay tax on the dividends?

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No they do not. From form 1040 instructions, a single, non-blind dependent under age 65 must file if the following are true:

You must file a return if any of the following apply.

  • Your unearned income was over $1,000.
  • Your earned income was over $6,200.
  • Your gross income was more than the larger of—
    • $1,000, or
    • Your earned income (up to $5,850) plus $350.

There is no return required for receipt of a gift.

  • I thought this had to be wrong, but it appears you are correct: "the donor is generally responsible for paying the gift tax". So @BenMiller's kids didn't even need to file a return for the previous year; applicable taxes should have been paid by the in-laws. – Dacio Jan 28 '15 at 21:29
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    @Dacio Correct. Gifts are technically a part of the Estate tax - you have a modest annual exclusion (up to $14000 per recipient this year) and a lifetime exemption (around 5.4 million). Above that you pay up to 40% in estate tax. This prevents people from getting around the estate tax by gifting their estate ahead of time (and the unification of the two makes gifting simpler, really). – Joe Jan 28 '15 at 21:56
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If the gift was stock that they have owned for years there can be one hitch: The basis of the stock doesn't reset when it is gifted.

For example if grandparents have owned stock that is currently worth $10,000 today, but they bought it decades ago when it only cost them $1,000; then if the new owner sells it today they will have a gain of $9,000.

The clock to determine short term/long term also doesn't reset; which is good.

The basis needs to be determined now so that the gain can be accurately calculated in the future. This information should be stored in a safe place.

Gains for dividends are investment income and the rules regarding the kiddie tax need to be followed.

  • +1 Thanks for the reminders about the cost basis and the kiddie tax. – Ben Miller Jan 30 '15 at 4:46

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