Gavin Newsom’s Toddler Tax Will Raid Kids’ Trump Accounts

The California Franchise Tax Board announced that it will refuse to treat newly created Trump Accounts as tax-deferred accounts for state tax purposes.

In doing so, California is purposefully making it difficult for families to fully utilize Trump Accounts.

As the San Francisco Chronicle notes, this is a major break from the state’s normal practice regarding retirement accounts:

“[California] does automatically conform to most laws relating to retirement accounts such as IRAs, 401(k) plans and pensions. However, the Franchise Tax board has determined that even though the Trump Accounts are defined as a new type of IRA, the state does not conform to the section of the federal tax code that created them.”

This means earnings from Trump Accounts will be taxed by California in the year they are realized, not deferred until distributed as intended. Savings accounts intended to help children save and invests for their future will now be taxed to fund California’s spending.

When asked, Gov. Gavin Newsom’s office refused to answer if Newsom would support a law overriding the Franchise Tax Board’s decision and conform with federal tax law.

If Newsom and the Franchise Tax Board refuse to conform to the new federal tax rules, California families will now pay taxes on their children’s investment earnings.

Months after Congress created federally tax-advantaged Trump Accounts to help young Americans start building wealth, California is positioning itself to turn a relatively simple pro-growth reform into a compliance nightmare.

How Trump Accounts Work

Trump Accounts are a new type of child-focused retirement investment vehicle created as part of the One Big Beautiful Bill Act (OBBA), signed into law by President Donald Trump on July 4, 2025.

Parents can open a Trump Account for any child under the age of 18. Additionally, every American child born between Jan. 1, 2025 and Dec. 31, 2028 is eligible to receive a one-time $1,000 contribution from the Treasury Department that will be immediately invested in an index fund.

Parents are authorized to manage the accounts until the child reaches age 18, at which point the account converts into a traditional IRA. Employers, nonprofits, and family members can contribute up to $5,000 to each Trump Account each year, with the employer contribution portion capped at $2,500. There is no cap on contributions from nonprofits. There is also no cap on contributions from state, local or tribal governments.

Americans for Tax Reform is tracking the announcements of companies providing contributions to children’s Trump Accounts. You can find the full list here.

Trump Accounts allow savings for children to grow tax deferred. Unless they live in California.

California Taxes Trump Accounts

California’s Franchise Tax Board has determined that Trump Accounts will not be tax-deferred accounts for state tax purposes. This means that California would tax earnings every single year as they are realized.

Worse, employer contributions to Trump Accounts would also be taxed as income to the employee for state taxes purposes. This means parents will be stuck paying taxes on their employer’s contributions, as if it were income, even though they are not the ultimate beneficiary of the Trump Account.

As Sandy Weiner, California editor for the tax information publisher Spidell Publishing, warns in the San Francisco Chronicle:

“Because these accounts belong to the child and not the parent, Weiner said that “kiddie tax” rules would apply for California taxes—but not federal. The kiddie tax applies to income from a minor’s investment account. A certain amount of investment earnings each year is tax free, an additional amount is taxed at the child’s rate and anything over that is taxed at the parent’s rate.”

Increased Paperwork Burden for California Families

Because California refuses to comply with the federal treatment of Trump Accounts, families will have to deal with the headache of maintaining two separate tax records for the same account.

One set would track contributions, earnings, and basis under federal law; the other would track California’s annual state taxes so they can avoid double taxation when these funds are inevitably withdrawn.

As San Francisco certified public accountant Richard Pon explains:

“The child will technically owe state income tax on their account earnings each year. Younger children probably won’t have enough income to have to pay tax or file a tax return. But they should record the taxable contributions and income earned each year that added to their California basis in the account, which will reduce their state taxes when they withdraw the money, but only if they track it.”

California should conform state tax law to federal treatment. Anything less is a penalty on newborn savers; a toddler tax that punishes working families for participating in Trump Accounts.

California’s families and their children deserve better.

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