Gifting to your children using custodial accounts is the most common method of shifting income and assets to children or grandchildren. The simplicity of setting up a custodial account, UGMA or UTMA, and keeping control of the assets from the child until age eighteen or 21 are the main features of this type of income-shifting method.

Specific Details

The parents shifted $5,000 of income to their child by gifting assets to their children using custodial accounts. Since the parents income was taxed at the 20% tax bracket, the income reduction may decrease their income taxes by $1,000 ($5,000 x 20%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,000.

Potential Savings

If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by gifting assets to your children using custodial accounts.