Kiddie Tax
Kiddie Tax
Quick Definition
The Kiddie Tax is an IRS rule that subjects a child's net unearned income above a threshold to taxation at the parent's marginal tax rate — not the child's lower rate. It was designed to prevent wealthy parents from transferring investment assets to their children to exploit lower tax brackets on investment returns.
What It Means
Before the Kiddie Tax was introduced in 1986, a straightforward tax minimization strategy was widely used: parents would transfer dividend-paying stocks or interest-bearing bonds to their children. The child's lower tax rate would apply to all the investment income — potentially saving thousands per year. Congress eliminated this strategy by taxing children's investment income above a threshold at the parents' rate.
The Kiddie Tax applies to children under age 19, and full-time students under age 24 (unless they have earned income exceeding half their support costs).
Kiddie Tax Thresholds (2024)
| Threshold | Amount (2024) |
|---|---|
| First unearned income | $1,300 — not taxed (covered by child's standard deduction) |
| Second tranche | $1,300 — taxed at child's own tax rate |
| Unearned income above $2,600 | Taxed at parent's marginal rate |
Unearned income subject to the Kiddie Tax includes:
- Dividends
- Interest income
- Capital gains
- Rental income
- Royalties
- Other passive income
Earned income (wages, self-employment, tips) is NOT subject to Kiddie Tax — children pay their own (typically lower) rate on earned income.
Kiddie Tax Calculation Example
| Situation | Amount |
|---|---|
| Child's unearned income (dividends + interest) | $8,000 |
| Standard deduction offset | -$1,300 |
| Taxed at child's rate (next $1,300) | $1,300 |
| Subject to parent's rate (Kiddie Tax) | $5,400 |
If the parent is in the 37% federal bracket and lives in a high-tax state, that $5,400 is taxed at 37% + state rate — the same as if the parent had earned it directly.
Who Is Subject to the Kiddie Tax
| Age | Condition | Kiddie Tax Applies? |
|---|---|---|
| Under 18 | Any | Yes |
| 18 | Not a full-time student | Yes |
| 18 | Full-time student | Yes, unless earned income > 50% of support |
| 19-23 | Full-time student | Yes, unless earned income > 50% of support |
| 19-23 | Not a full-time student | No |
| 24+ | Any | No |
How Kiddie Tax Is Calculated and Filed
The child's Kiddie Tax is calculated on Form 8615 (Tax for Certain Children Who Have Unearned Income), which must be attached to the child's Form 1040.
The parent's return information is needed to complete Form 8615 — the parent's taxable income and tax rate determine how much Kiddie Tax the child owes.
Alternative election: Parents may elect to include the child's investment income on their own return using Form 8814 (if it meets certain criteria) — eliminating the need for a separate child return.
Kiddie Tax and 529 Plans / Custodial Accounts
| Account Type | Kiddie Tax Implications |
|---|---|
| 529 plan | Earnings are NOT subject to Kiddie Tax as long as distributions are used for qualified education expenses |
| Roth IRA for a child | Contributions require earned income; growth not subject to Kiddie Tax until withdrawal |
| UTMA/UGMA custodial account | Investment income is subject to Kiddie Tax if child meets age/status criteria |
| I Bonds / Series EE Bonds | Interest deferred until redemption — may be exempt from Kiddie Tax if used for education |
Tax Planning Strategies Around the Kiddie Tax
| Strategy | How It Helps |
|---|---|
| Growth stocks over dividend payers | Unrealized capital gains avoid current Kiddie Tax; sell after age 24 |
| Tax-loss harvesting in custodial accounts | Realize losses to offset gains; keep net unearned income below the threshold |
| 529 contributions instead of UTMA | Avoid Kiddie Tax entirely on education savings |
| I Bonds for college savings | Defer interest; potentially exclude from income entirely if used for education |
| Encourage child employment | Earned income taxed at child's rate; no Kiddie Tax; can fund Roth IRA |
Key Points to Remember
- Kiddie Tax taxes a child's unearned income above $2,600 (2024) at the parent's higher marginal rate
- Applies to children under 19 and full-time students under 24 (unless self-supporting)
- Covers unearned income only — wages and self-employment income are not subject to Kiddie Tax
- Calculated on Form 8615, which requires the parent's tax information
- 529 plans are the best education savings vehicle to avoid Kiddie Tax on investment growth
- Consider growth-oriented investments (low/no dividends) in custodial accounts to defer gains past age 24
Frequently Asked Questions
Q: Does a child need to file a separate tax return for Kiddie Tax? A: Generally yes — the child files their own Form 1040 with Form 8615 attached. However, if the child's only income is from interest and dividends and certain other conditions are met, parents can elect to report it on their own return using Form 8814. The Form 8814 election has trade-offs: it may increase the parents' AGI, potentially phasing out deductions or credits.
Q: How does the Kiddie Tax affect 529 plan withdrawals? A: Qualified 529 withdrawals (for tuition, room and board, books, etc.) are completely tax-free — the Kiddie Tax does not apply to them at all. Non-qualified withdrawals would include the earnings portion in income, which could be subject to Kiddie Tax plus a 10% penalty. This is one reason 529 plans are superior to UTMA/UGMA accounts for college savings.
Q: If my child earns money from a summer job, does Kiddie Tax apply? A: No — Kiddie Tax only applies to unearned income (investment income). Wages and self-employment income from a job or business are taxed at the child's own rate, regardless of the parent's rate. A child with $5,000 in summer wages pays tax at their own bracket (often 10% or 0%), not the parents' rate.
Related Terms
1099
A 1099 is the IRS information return that reports income paid to non-employees — covering freelance income, investment earnings, retirement distributions, and dozens of other non-wage income sources.
83(b) Election
An 83(b) election is a tax strategy that allows recipients of restricted stock to pay income tax on the grant date value instead of the vesting date value, potentially saving substantial taxes if the stock appreciates significantly.
Capital Gains
Capital gains are the profits earned when you sell an asset for more than you paid for it, taxed at either short-term rates (ordinary income) or preferential long-term rates depending on how long you held the asset.
Taxable Income
Taxable income is the portion of your income subject to federal income tax after subtracting all allowable deductions from your AGI — the number your tax bracket rates are actually applied to.
Tax Deduction
A tax deduction reduces your taxable income, lowering the amount of income subject to federal tax — with the actual tax savings equal to the deduction amount multiplied by your marginal tax rate.
Tax Bracket
A tax bracket is the range of income taxed at a specific rate in the U.S. progressive tax system, where higher income levels are taxed at higher rates — but only the income within each bracket is taxed at that bracket's rate.
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