<p>I'm a rising freshman at the University of Michigan, and now that I'm 18, I'm fortunate enough to have access to a decent sized UTMA account. My parents and I agree that some if not all of the money should go towards funding my undergraduate degree. Unfortunately, I'm the eldest child, none of us is very savvy to the ins and outs of this whole process, and our family friend (who also happens to be our de facto financial expert) has gone AWOL. With the beginning of first semester just a few weeks away, I figured that it wouldn't hurt to try College Confidential.</p>
<p>My main question: Now that the account will be in my name, will I have to pay taxes on it, and are there any breaks if the funds only go towards my expenses while I'm a college student? More generally, does anybody know where we'd be able to find information regarding taxes on UTMA money that goes to higher education costs?</p>
<p>You have always had to pay taxes on investment income in the UTMA if it was greater than $1900/year. The first $950 in income is tax-free, then next $950 is taxed at the child’s rate (10%) and the income after that is taxed at the parents’ rate. It’s possible that your UTMA didn’t have this much income so you didn’t need to file, or that your parents just included the taxable UTMA income (if any) on their own taxes. Nothing really changes for you tax-wise as long as you’re under 24 and a fulltime student; you’ll continue to pay taxes at your parents’ rate if you have investment income over $1900/year. </p>
<p>[Minors</a> Taxed at Parents’ Rates: The Kiddie Tax](<a href=“http://www.fairmark.com/college/kidtax/kiddietax.htm]Minors”>http://www.fairmark.com/college/kidtax/kiddietax.htm)</p>
<p>With some exceptions, your parents may be able to claim tax credits or deductions on their tax returns. This has nothing to do with your UTMA, however.</p>
<p>[Two</a> Tax Credits to Help Pay Higher Education Costs](<a href=“http://www.irs.gov/newsroom/article/0,,id=218389,00.html]Two”>http://www.irs.gov/newsroom/article/0,,id=218389,00.html)</p>
<p>You can invest your UTMA money in a 529 account where it will grow tax-free in the future if it is used to fund higher education expenses. But the returns might not match those of your UTMA depending on your investment choices and risk tolerance as a 529 would be mostly invested in cash.</p>