Kids, Stocks and Taxes

I want to buy 50 shares of stock for each of my two children through Sharebuilder.com. What are the tax implications of minor children owning stock in a custodial account?

Children younger than 19 or full-time students younger than 24 (assuming they do not provide more than half of their own support) may be subject to kiddie-tax rules. The first $950 of each child’s investment income in both 2010 and 2011 is tax-free, and the next $950 is taxed at the child’s own rate. Any investment income above $1,900 is taxed at the parents’ higher rate. However, the higher rate applies only to a child’s investment income, not to wages or self-employment income.

For some ideas of stocks that are likely to get kids interested in investing, see 5 Stocks Kids Would Love for the Holidays.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.