Many parents are not aware that the so-called “kiddie tax” exists. Others assume it affects only minor children. However, it also can apply to full-time students through age 23 and 18-year-olds even if they are not full-time students. When it does apply, most of the child’s unearned income may be taxed at the parent’s higher tax rate.
The purpose of the kiddie tax is to minimize the ability of parents to significantly reduce their family’s taxes by transferring income-producing assets to their children that are in lower tax brackets. If your child has investment income from custodial accounts or other assets, understanding these rules can help you avoid unexpected tax consequences.
Who the Kiddie Tax Affects
The kiddie tax generally applies to most unearned income of individuals who, at the end of the tax year, are:
- Under age 18,
- Age 18 (unless they provide more than half of their own support from earned income), or
- At least age 19 but under age 24 and full-time students (unless they provide more than half of their own support from earned income).
The name “kiddie tax” can be mis-leading as it can last until the year that he or she turns age 24. Once a full-time student reaches age 24 (even if mostly supported by their parents) they are kiddie tax exempt.
How the Kiddie Tax Works
Earned income from a job or self-employment is never subject to the kiddie tax. And the tax is assessed on a child’s (or young adult’s) unearned income only to the extent that it exceeds the applicable threshold, which is $2,700 for 2026 (the same as it was for 2025).
Unearned income usually means interest, dividends and capital gains. It can also mean rents, royalties, taxable Social Security and trust distributions. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.
For 2026, the first $1,350 of unearned income is taxed at 0%. The second $1,350 is taxed at the child’s (or young adult’s) rate. This might also be 0% for some or all of the second $1,350, depending on 1) how much of the unearned income is made up of long-term capital gains and qualified dividends, and 2) whether the child’s (or young adult’s) taxable income is low enough for him or her to qualify for the 0% rate.
Then the excess is taxed at the parent’s rate. This could be up to 20% on long-term capital gains and qualified dividends and as much as 37% on interest, short-term capital gains and nonqualified dividends — depending on the parent’s taxable income. Rents, royalties, taxable Social Security and trust distributions would also be taxed at the parent’s rate of 37% unless a specific exclusion applies.
When the Kiddie Tax Applies
For 2026, complete Form 8615, “Tax for Certain Children Who Have Unearned Income,” as part of the child/young adult’s tax return under these circumstances:
- Has more than $2,700 of unearned income,
- Is required to file Form 1040,
- As of December 31, 2026, is under age 18, is age 18 and didn’t have earned income in excess of half of his or her support, or is age 19, 20, 21, 22 or 23 and a full-time student and didn’t have earned income in excess of half of his or her support,
- Has at least one living parent, and
- Is not married and is not filing a joint return for the year.
The kiddie tax threshold is annually adjusted for inflation, but generally only in increments of at least $100. It may not go up every year as it did not increase for 2026. This could mean that it is more likely to increase for 2027.
Tax Planning Opportunities
The kiddie tax can increase a family’s overall tax liability if investment income is generated in a child’s name. In some situations, it may make sense to review the types of investments owned in custodial accounts and the timing of investment sales. For example, growth-oriented investments (like growth stocks/funds) that generate little current income may help reduce exposure to the kiddie tax until the young adult is no longer subject to this tax. At that time, appreciated investments can begin to be sold, with the gains taxed at the child’s own, and generally lower, tax rate.
Another planning opportunity is that because kiddie tax only applies to unearned income, if a family business pays wages to their children, this would be considered the child’s earned income and, therefore, would not be subject to any “kiddie tax”.
If you would like help evaluating your family’s situation, please contact us. We can assess potential kiddie tax exposure and suggest tax-efficient investment strategies.
