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 bracket, 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).

For 2026, the threshold remains $2,700, unchanged from 2025. The first $1,350 of a child's unearned income is tax-free (covered by the dependent standard deduction), the next $1,350 is taxed at the child's own rate, and any amount above $2,700 is taxed at the parent's marginal rate.

Kiddie Tax Thresholds (2026)

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. Read our guide on how teenagers can file taxes for more on earned vs. unearned income for minors.

Kiddie Tax Calculation Example

If the parent is in the 24% federal bracket, that $5,300 is taxed at 24%, the same as if the parent had earned it directly. The child's tax on the $1,350 middle tranche at 10% is $135. The Kiddie Tax portion at 24% is $1,272. Total federal tax: $1,407.

Who Is Subject to the Kiddie Tax

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 the child's gross income is less than $13,500 for 2026 and consists only of interest and dividends). This eliminates the need for a separate child return but may increase the parents' AGI, potentially phasing out deductions or credits.

Kiddie Tax and 529 Plans / Custodial Accounts

Tax Planning Strategies Around the Kiddie Tax

Use our tax bracket calculator to see how the Kiddie Tax affects your family's overall tax picture.

Key Points to Remember

• Kiddie Tax taxes a child's unearned income above $2,700 (2026) at the parent's higher marginal rate
• The $2,700 threshold is unchanged from 2025, built as twice the $1,350 dependent standard deduction floor
• 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 or no dividends) in custodial accounts to defer gains past age 24

Common Mistakes to Avoid

• Assuming the Kiddie Tax applies to all of the child's income: Only unearned income above $2,700 triggers the Kiddie Tax. A teenager earning $5,000 at a summer job pays tax at their own rate, not the parents' rate. The Kiddie Tax does not touch wages, self-employment income, or tips.
• Forgetting to file Form 8615: If your child has more than $2,700 in unearned income, Form 8615 must be attached to their Form 1040. Missing this form can trigger IRS notices and penalties. The form requires the parent's taxable income information, so you need to coordinate filing timing.
• Overlooking the Form 8814 election trade-offs: Including the child's income on your return via Form 8814 simplifies filing but increases your AGI, which can phase out deductions, credits, and Roth IRA eligibility. Run the numbers both ways before choosing.
• Using UTMA/UGMA accounts when a 529 plan would work better: Custodial accounts offer flexibility but expose investment income to the Kiddie Tax. If the funds are for education, a 529 plan avoids Kiddie Tax entirely on qualified withdrawals.

Related Concepts

The Kiddie Tax connects to several other tax concepts. Your tax bracket determines the rate applied to the child's excess unearned income. Taxable income and AGI on the parent's return drive the calculation. Capital gains tax rates apply to the child's investment gains. The child files using Form 1040 with Form 8615 attached. 529 plans and custodial accounts have different Kiddie Tax implications. Read our guide on how teenagers can file taxes for practical filing advice.

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 their gross income is less than $13,500 for 2026, 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. Read our guide on how teenagers can file taxes for more details.

Q: Were the 2026 Kiddie Tax thresholds adjusted for inflation? A: No. The $2,700 threshold for 2026 is unchanged from 2025. The threshold is built as twice the $1,350 dependent standard deduction floor under IRC Section 63(c)(5)(A). Because the $1,350 floor did not change for 2025 or 2026, the $2,700 Kiddie Tax threshold also remained the same. If inflation picks up, these figures will adjust in future tax years.