Will Trump Account Contributions Trigger Gift Tax Return Filing?

[BobKamman]

From the Washington Post:

Parents who put money into their children’s “Trump Accounts” might face a headache come tax time: Even the smallest contributions may require them to fill out a little-used gift tax form [709] that can take hours to complete.

. . .because there’s no provision for contributions to Trump Accounts to count as exempt gifts under current tax law, donors would have to declare every contribution, several tax experts say. This applies whether the donation is $25 or as much as the $5,000 annual cap. That’s because to be considered a tax-exempt gift, the recipient has to be able to access the money right away. Trump Account beneficiaries cannot withdraw the money until they turn 18.

Asked whether Trump Account contributions are required to be reported, an IRS spokesman referred questions to the Treasury Department, where several officials did not answer questions from The Washington Post.

The American College of Trust and Estate Counsel, a lawyers group, sent a letter raising the issue to the congressional tax-writing committees last month. The group’s Washington affairs chair Kevin Matz said his group received no answer beyond acknowledgment that their letter was received.

Congress has dealt with a problem like this before. Lawmakers approved a clause exempting 529 accounts — the tax-advantaged savings accounts for a child’s education — from the requirement that the recipient have present use of the gift. That means parents, grandparents and others can put money in 529 accounts without filing gift tax returns.

. . .Even without the tax-filing complications, Trump Accounts might not be the best way for most parents to save money for their children, experts say. The 529 plans offer much better tax benefits — unlike Trump Accounts, parents can often take some state tax deductions when they put money into the account, and if the child uses the money to pay for education, the earnings inside the account are never taxed.

If parents want a multipurpose savings vehicle for their kids that is not just limited to education spending, an ordinary taxable brokerage account might also be a better choice, tax professionals say. Trump Accounts are untaxed during the beneficiary’s childhood, when the money is growing in the account, unlike a brokerage account that could require paying taxes on any dividends. But the tax treatment when the child does withdraw the money could be much more favorable on the brokerage account — that money gets the lower capital gains tax rate, while Trump Account withdrawals are taxed at the same rate as ordinary income, and even come with a 10 percent tax penalty if the child doesn’t use the money for a qualified purpose.