My daughter is 2 years old. I thought about putting $5000 into an investment account. My question is, at the end of the year, lets say she had divideds of $500, will she have to pay taxes on the income due to the fact that this is the entire amount of her income. If I kept reinvesting the dividends, when we pull this money out for college will she have to pay taxes on the dividends again or just the profit recieved on the dividend. At the time of taking the money out. What would be the amount of profit you would be able to take out without paying taxes. I konw that all the % will be different at that time, but if you used todays rates, any idea of the information.

All the investment income will be income to your daughter. For 2008 she can make $900 tax free. Assuming this is a stock or stock fund, when the money is pulled out for college it will be treated as a sale of stock. From that she will deduct the money she put in over the years and also the reinvested dividends, and pay tax on the difference. Congress keeps changing the kiddie tax rules, so over the years I feel sure things will change. You may want to look into a 529 plan and contact your tax adviser.