The Kiddie Tax
Giving investments to a child does not automatically move the income into the child's low bracket. Under the kiddie tax, a child's unearned income above a small amount, indexed for inflation each year, is taxed at the parents' rate. For parents in the 35% bracket, every $10,000 of that income costs $3,500 instead of $1,000 at the child's 10% rate.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Parents and grandparents who hold, or plan to fund, custodial (UTMA/UGMA) accounts for children
- Families whose children receive interest, dividends, or capital gains from gifts or inheritances
- Business owners who can legitimately employ their children
- Parents comparing custodial accounts with 529 plans and Trump accounts
Who it's not for
- Children whose investment income stays under the indexed threshold
- Children 19 or older who are not full-time students, or students whose earned income covers more than half their support
- Families looking for an income-shifting arrangement without real ownership or real work
How it works
The kiddie tax applies to children under 19, and to full-time students under 24 whose earned income does not exceed half of their support. Unearned income means interest, dividends, capital gains, and other investment income. Wages and self-employment income are not affected.
A small amount of unearned income is sheltered by the child's standard deduction, and a second small amount is taxed at the child's own rate. Both amounts are indexed for inflation each year. Unearned income above that is taxed at the parents' marginal rate on Form 8615.
Parents can sometimes report the child's income on their own return with Form 8814. That avoids a separate return but can raise the parents' AGI and the total tax. Run both ways.
The planning moves are about the type and timing of income. Growth investments that pay little in dividends defer income. A 529 plan grows tax-free for education, including up to $20,000 a year of K-12 tuition starting in 2026. Trump accounts, up to $5,000 a year, grow tax-deferred. Selling appreciated assets after the child ages out can move gains to the child's own lower rates.
Earned income is the cleanest path. A child who works in the family business for reasonable pay earns wages outside the kiddie tax. With $16,000 of wages, the child's standard deduction covers all of it, and the child can contribute up to $7,500 of those wages to a Roth IRA.
Illustrative example
Illustrative: a 15-year-old's custodial account produces interest and dividends, and $10,000 of that income sits above the indexed kiddie tax threshold. The parents are in the 35% bracket.
- Tax on the $10,000 at the parents' rate: $10,000 x 35% = $3,500
- Tax if it were taxed at the child's 10% rate: $10,000 x 10% = $1,000
- Extra cost of the kiddie tax: $3,500 - $1,000 = $2,500 a year
- Repositioning that portion into a 529 plan for education removes the $3,500 of annual tax on its growth, if withdrawals are used for qualified expenses
In this illustration, the kiddie tax costs the family $2,500 a year, and moving that money into a 529 plan can keep the full $3,500 a year invested.
The rules
| Rule | Citation |
|---|---|
| A child's net unearned income above an indexed threshold is taxed at the parents' rate. | IRC §1(g) |
| The rule covers children under 19 and full-time students under 24 whose earned income does not exceed half of their support. | IRC §1(g)(2) |
| Parents may elect to include a child's interest and dividends on their own return in certain cases. | IRC §1(g)(7) |
| A dependent's standard deduction is limited, but it rises with earned income up to the regular standard deduction. | IRC §63(c)(5) |
Watch-outs
- Wages paid to children must be for real work at reasonable pay, with timesheets and payroll records. The IRS looks at these closely.
- Custodial accounts belong to the child. The money cannot be taken back, and the child gets control at the age set by state law.
- Custodial assets count more heavily than parent-owned assets in college financial aid formulas. Weigh that before funding.
- A large capital gain in the child's account in one year, such as selling a gifted stock, can trigger the tax at the parents' top rate.
What we do
We compute the child's return and the Form 8615 or Form 8814 result, compare the two, and show where custodial money would be better placed. For family employers, we set up payroll for children correctly and document the work.
Questions
Does the kiddie tax apply to my child's job income?
No. It applies only to unearned income such as interest, dividends, and capital gains.
Does it apply to income in a 529 plan or Roth IRA?
No. Earnings inside those accounts are not currently taxed, so the kiddie tax does not reach them.
When does it stop?
Generally in the year the child turns 19, or 24 if a full-time student whose earned income does not cover more than half of their support.