My kids (minors) each received a gift of some stock from my wife's parents last year. The stock is in the kids' names, with my wife listed as the custodian. They each made just slightly over $100 in dividends last year, and have no other income. No income tax was withheld. They each received a 1099-DIV form.
Are they required to file a tax return and pay tax on the dividends?
No they do not. From form 1040 instructions, a single, non-blind dependent under age 65 must file if the following are true:
You must file a return if any of the following apply.
- Your unearned income was over $1,000.
- Your earned income was over $6,200.
- Your gross income was more than the larger of—
- $1,000, or
- Your earned income (up to $5,850) plus $350.
There is no return required for receipt of a gift.
If the gift was stock that they have owned for years there can be one hitch: The basis of the stock doesn't reset when it is gifted.
For example if grandparents have owned stock that is currently worth $10,000 today, but they bought it decades ago when it only cost them $1,000; then if the new owner sells it today they will have a gain of $9,000.
The clock to determine short term/long term also doesn't reset; which is good.
The basis needs to be determined now so that the gain can be accurately calculated in the future. This information should be stored in a safe place.
Gains for dividends are investment income and the rules regarding the kiddie tax need to be followed.
