Kiddie Tax: How Children’s Investment Income Is Taxed

Parents and grandparents often invest for children through custodial accounts, savings bonds, or brokerage accounts. Years ago, families could shift investment income to children and have it taxed at the child’s low rate. Congress closed much of that opportunity with the kiddie tax, which taxes a portion of a child’s unearned income at the parents’ tax rate. If your child has dividends, interest, or capital gains, understanding the kiddie tax helps you avoid surprises and plan investments wisely. This guide explains who is subject to the kiddie tax, how the thresholds work, how to report it, and strategies to manage it. Tax rules change, so verify current figures on IRS.gov or with a tax professional.

What the kiddie tax is

The kiddie tax is a set of rules in the Internal Revenue Code that applies to a child’s unearned income above an annual threshold. Unearned income includes:

Interest
Dividends
Capital gains distributions and capital gains from selling investments
Rents and royalties
Taxable distributions from trusts
Taxable scholarship income not reported on a W-2, in some cases

Earned income, such as wages from a job or self-employment income, is not subject to the kiddie tax. It is taxed at the child’s own rates.

Who the kiddie tax applies to

The kiddie tax generally applies if the child’s unearned income exceeds the annual threshold and the child is:

Under age 18 at the end of the tax year, or
Age 18 at year-end and had earned income that was not more than half of their own support, or
A full-time student age 19 to 23 at year-end whose earned income was not more than half of their support.

In addition, at least one parent must be living, and the child must be required to file a tax return and not file a joint return for the year.

How the thresholds work

The kiddie tax uses a tiered structure, with amounts adjusted for inflation each year. For 2025, the tiers were:

Child’s unearned income	How it is taxed
First $1,350	Generally not taxed, offset by the child’s standard deduction
Next $1,350	Taxed at the child’s own tax rate
Above $2,700	Taxed at the parent’s marginal tax rate

Check IRS Publication 929 and the instructions for Form 8615 for the current year’s figures, since they change annually.

Example

A 12-year-old has $5,000 of dividends and capital gains from a custodial account and no earned income. Using the 2025 tiers, the first $1,350 is covered by the standard deduction, the next $1,350 is taxed at the child’s rate, and the remaining $2,300 is taxed at the parents’ marginal rate. If the parents are in the 24% bracket, that $2,300 would be taxed at 24% for ordinary income, or at the parents’ long-term capital gains rate for qualified dividends and long-term gains.

Reporting the kiddie tax

Form 8615: on the child’s return

If the kiddie tax applies, the child usually files their own tax return and attaches Form 8615, Tax for Certain Children Who Have Unearned Income. The form calculates the tax on the child’s net unearned income using the parent’s tax rate. You will need information from the parent’s return, such as taxable income and filing status.

Form 8814: on the parent’s return

Parents may elect to report a child’s interest and dividends on their own return using Form 8814, Parents’ Election To Report Child’s Interest and Dividends, if:

The child’s only income is interest and dividends, including capital gains distributions,
The child’s gross income is below a set limit, which was $13,500 for 2025,
The child made no estimated tax payments and had no backup withholding, and
Other conditions are met.

This election can simplify filing, but it can increase the parents’ adjusted gross income, which may affect deductions, credits, and other income-based tax items. It can sometimes produce a higher total tax than filing separately. Compare both methods before choosing.

How custodial accounts are affected

Accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) belong to the child for tax purposes. Income earned in these accounts is the child’s income and can trigger the kiddie tax. Gifts to these accounts are irrevocable, and the child gains control at the age set by state law, often 18 or 21.

Custodial assets also count more heavily as student assets on the FAFSA than parent assets, which can affect financial aid.

Strategies to manage the kiddie tax

Use tax-advantaged accounts

529 plans. Earnings grow tax-deferred and are tax-free when used for qualified education expenses. Parent-owned 529 accounts are not the child’s income and are not subject to the kiddie tax.
Coverdell education savings accounts also offer tax-free growth for education, with lower contribution limits.
Roth IRA for a working child. A child with earned income can contribute up to the lesser of their earnings or the annual IRA limit. Earnings in the Roth are not taxed currently.

Choose tax-efficient investments

Growth-oriented investments that pay little in dividends, such as many broad stock index funds, generate less taxable income each year.
Municipal bonds generate interest that is generally exempt from federal income tax.
U.S. savings bonds let owners defer interest until redemption, and interest may be tax-free when used for qualified education expenses, subject to rules and income limits.

Manage the timing of gains

Hold appreciated investments until the child is no longer subject to the kiddie tax, when gains may be taxed at the child’s lower rates, possibly at the 0% long-term capital gains rate.
Harvest gains up to the lower tiers each year to use the child’s standard deduction and lower rate.
Give appreciated assets to a charity instead of selling them in the child’s account, where appropriate.

Employ your child

If you own a business, paying your child reasonable wages for real work creates earned income, which is not subject to the kiddie tax and can fund a Roth IRA. Wages must be reasonable for the work performed, and payroll rules apply.

Common mistakes

Forgetting the child must file. If unearned income exceeds filing thresholds, a return is required even if the child had no job.
Using the wrong parent’s information. For married parents filing separately or divorced parents, specific rules determine which parent’s rate applies.
Ignoring state taxes. States have their own rules, and some do not follow the federal kiddie tax.
Assuming the Form 8814 election is always simpler and cheaper. It may increase the family’s total tax.

Which parent’s rate applies

If the parents are married and file jointly, their joint return is used. If they file separately, the parent with the higher taxable income is used. If the parents are divorced or separated, the custodial parent’s return is generally used. If the parents are unmarried and living together, the parent with the higher taxable income is used.

Frequently Asked Questions

What is the kiddie tax?

It is a federal tax rule that taxes a child’s unearned income above an annual threshold at the parent’s marginal tax rate instead of the child’s rate.

At what age does the kiddie tax stop?

It generally applies to children under 18, to 18-year-olds whose earned income does not exceed half their support, and to full-time students ages 19 to 23 who meet the same support test.

Does the kiddie tax apply to a child’s wages?

No. Earned income from a job or self-employment is taxed at the child’s own rates and is not subject to the kiddie tax.

Can I report my child’s investment income on my return?

Yes, if conditions are met. Form 8814 lets parents report a child’s interest and dividends, but it may raise the parents’ income and total tax.

Does a 529 plan trigger the kiddie tax?

Generally no. A parent-owned 529 plan’s earnings are not the child’s income, and qualified withdrawals for education are tax-free.

This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.