What strategy should a parent use to avoid paying income taxes on investments made for a minor child?

The choice to select funds that distribute capital gains only is often the preferred strategy for parents looking to minimize the income tax burden on investments made for a minor child. This approach takes advantage of how capital gains are taxed, as only the gains are taxed when realized, and if the child has little or no other income, they may not owe any tax at all on these gains.

When a child has a low income, they benefit from the basic personal exemption, which allows them to earn a certain amount each year without paying taxes. By focusing on investments that primarily generate capital gains rather than interest or dividend income, parents can provide children with a way to grow their investments while possibly avoiding taxes altogether, especially if those capital gains are only realized when the child reaches a higher income bracket.

In contrast, options like investing in high-interest accounts may result in significant taxable interest income, which could lead to a tax liability. Choosing bonds over stocks generally generates interest income, which is taxed at the parent's rate in the case of minor children. Finally, using a joint investment account could lead to income attribution rules, where the investment income is taxed in the hands of the parent rather than the child, negating any potential tax advantage.

Thus, selecting funds that distribute capital