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Tax Implications on a Child's Savings Account

Savings Account with Trustee

If a parent is named as a trustee (power of administration) on a minor (younger than 18) child's savings account, the child is responsible for paying the income tax on the interest if two facts are true of the account. The Internal Revenue Service (IRS) states that if the savings account belongs to the child legally and the parents cannot legally support the child with the money in the account, then the child is held responsible for paying taxes on the interest income of the account. If those two facts are not true of the account, or one of them is untrue, the child is not responsible for paying taxes on the interest, but the trustee is.

Custodial Savings Account

A parent who is listed as a custodian on a child's savings account must supply the bank--or payer of interest--with the child's social security number. The income interest on the account is taxable to the child's Social Security Number, not to that of the custodian. This means that unless the savings account is earning an exorbitant amount of interest, there will likely not be tax implications. Most interest earned on a child's savings account falls far below the taxable amount of income for a Social Security Number, according to Susan Rosenstein of First Choice Bank.

Savings Bond Interest

Savings bonds are thought of as great gifts for children. Some parents or grandparents, for example, buy the children in their lives savings bonds at birth, or even every birthday. According to the IRS, if a savings bond "is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond." The IRS goes on to say that if a person or a parent buys a savings bond in the name of another person (such as a child), and the other person is the only owner of the bond, it is that person (the owner, i.e. the child) who must report the interest income.

529 Plans

A 529 plan is a savings plan specifically for a college or university education. It is an investment account, rather than a savings account. As an investment for education, it grows tax-free and isn't taxed when it's withdrawn as long as it's used for education costs (tuition, books). According to Baby Center, 529 plans offer excellent tax breaks, if the money remains in the plan. Some states may tax withdrawals--even for educational purposes--but the federal government will not, and parents can choose to open a 529 plan in any state, no matter where they live.

Investment Income

Although investments are not savings accounts, so to speak, some parents may make investments in the name of a child as a way to save for that child's future. Regarding investment income of a minor child, the IRS states that "Part of a child's 2009 investment income may be taxed at the parent's tax rate. If so, Form 8615, Tax for Certain Children With Investment Income of More Than $1,900, must be completed and attached to the child's tax return. If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate."

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