Income taxes on college fund
We have been giving our son stocks and cash under the Uniform Gifts to Minors Act, and he now has assets of about $20,000 in utility stocks and US Treasury notes. During 1981 these investments will earn about $2,200 in interest and dividends, with the rate continuing. He is now aged 10. He will be liable for significant taxes as the fund increases. Is there some alternative that will reduce taxes and give him a moderate amount of security? M. M.
Growth stocks that throw off little income each year could allow your son's college fund to grow without incurring excessive tax liabilities. However, the prices of growth stocks vary, and they could be down at the time your son needs the cash to begin college. Thus, a mixture of fixed income investments, such as the US Treasury notes, along with growth stocks, could keep income relatively low for now. Another trick now is to buy discounted bonds with the idea of selling them later for a capital gain. To assure full face value, bonds could be bought now at a discount with maturity dates timed for those years when your son will be needing cash for college expenses. Unfortunately, the IRS considers the gain from a bond's purchase value to its face value at maturity as ordinary income rather than a capital gain. Consider how much less your son's tax liabilities are likely to be than the tax on similar income at your own marginal rate. Setting aside money for your son as gifts within the $3,000 annual limit makes good sen se, but taking risks to avoid tax does not appear prudent.