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I'm in the process of moving a child's savings account from a bank that pays virtually no interest, to one that pays an amount where - while the amount they will earn is still quite low, it will at some point potentially have some tax consequences.

When I am filling out the account application, it is asking me who the primary account holder will be - me, or my child. Specifically, it says that the person I select "will be taxed on the interest earned on this account."

My initial thought is that if I put my child as the primary account holder, then there will be no tax consequences, or even any need to report or file a return for the interest they receive, until such point as their earnings reach $1,050 per year. (They are young enough that they will not have jobs for at least a few more years.) However, if I put myself as the primary account holder, then whatever interest they receive will be taxed at my rate.

However, the research I have done on this has made me more confused. On Intuit's web site they state regarding attaching their income to my return "depending on the level of your income, [this] may result in higher income tax than if you prepare a separate return for your child. This is because it could push you into a higher tax bracket, where higher tax rates may apply." Why would it only increase in higher income tax if I am pushed into a higher bracket? Wouldn't I have to pay tax on all the interest they earn in any case if I report it on my my income, whereas most likely there would be no tax due if it is reported on their tax returns (which they would not even need to file until the amount received exceeds $1,050 in a year)?

What is the best way to answer the question of who is the primary account holder for tax planning purposes?

  • How much do you anticipate the account to earn in interest? Off the top of my head, I remember something about banks not even sending out 1099s for anything under $10. – Michael Aug 3 '17 at 21:13
  • @MichaelC. Currently I would anticipate it being something close to $10... possibly more, possibly less. – Michael Aug 3 '17 at 21:56
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The person who is "primary" on the account is responsible for including the interest in their income. For a relatively small child's account, I would expect that it'd make the most sense for that to be the child. As you say, for a small amount of income, where the child makes no other income, the child won't need to file a return and won't be taxed on the income.

There is a provision that if the child makes enough money that they would need to pay tax or otherwise file a return, and you'd rather not handle that paperwork and just include it in your own income, that you can elect to do so. This makes your own income higher, which may result in more total tax between the two of you than if you just paid the tax on your income and your child paid their own tax. I believe that's what the warning that you're finding in your research is. They're talking about having the account in the child's name, but including the income on your taxes. But if the amount of unearned income is low enough, there's no advantage to claiming it on your own income since the child won't be paying taxes anyway.

I can't think of any "normal" cases where it'd be advantageous to have the account in the parent's name, from a strictly total tax minimization point of view, unless the child is earning more income than the parent (or at least earning enough that it's worth comparing the marginal rates to check).

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