The Kiddie Tax, Explained: Why a Child's Investment Income Can Be Taxed at the Parents' Rate

Families sometimes put stocks, bonds, or custodial brokerage accounts in a child's name to take advantage of that child's lower tax bracket. The kiddie tax exists specifically to limit how effective that strategy can be. Rather than letting all of a child's investment income be taxed at the child's typically low rate, federal law taxes a slice of it at the parents' marginal rate instead. The rule has been part of the tax code since the 1980s and was modified by the Tax Cuts and Jobs Act and later legislation, so the mechanics matter to any household with custodial accounts, trust distributions, or investment gifts to children.

Who the Kiddie Tax Applies To

According to IRS guidance, the kiddie tax generally applies to a child if all of the following are true: the child has unearned income above the annual threshold, the child is required to file a tax return, the child does not file a joint return for the year, and at least one parent was alive at year-end. Age matters too: the rule can apply to children under age 19, or under age 24 if they are full-time students, unless the child's earned income covers more than half of their own support.

• Unearned income includes interest, dividends, capital gains, rents, royalties, and taxable Social Security or pension income paid to the child.
• Earned income from wages or self-employment is not subject to the kiddie tax and is taxed using the child's own single-filer brackets.
• The rule can apply even if the account is a custodial UTMA or UGMA account and the child never touches the money.

How the Calculation Works

The kiddie tax uses a three-tier structure. For 2024, the IRS set the first $1,300 of a child's unearned income as tax-free, offset by the child's standard deduction. The next $1,300 is taxed at the child's own rate, which is often 10 percent. Any unearned income above $2,600 is taxed at the parents' marginal tax rate, which can be significantly higher. These dollar thresholds are indexed for inflation and adjusted most years, so the exact figures should be confirmed against the current-year version of IRS Publication 929 before filing.

• Tier 1: First $1,300 of unearned income — generally tax-free (2024 amount).
• Tier 2: Next $1,300 — taxed at the child's own rate (2024 amount).
• Tier 3: Everything above $2,600 — taxed at the parents' top marginal rate (2024 threshold).

Reporting Options: Form 8814 or Form 8615

Families have two main paths for reporting a child's investment income subject to the kiddie tax. Under certain conditions, a parent can elect to include the child's unearned income directly on the parent's own return using Form 8814, which avoids the need for the child to file a separate return. This election is only available if the child's income falls within specific limits and consists solely of interest, dividends, and capital gain distributions. Alternatively, the child can file their own tax return and attach Form 8615, Tax for Certain Children Who Have Unearned Income, to calculate the portion taxed at the parents' rate. Choosing between the two can affect the total tax bill, eligibility for certain credits, and whether the child's return shows a filing history, so the IRS instructions for both forms lay out the eligibility rules in detail.

Planning Considerations

In the author's view as a matter of general practice, and not as individualized advice, families considering custodial accounts should weigh the kiddie tax alongside other factors: custodial accounts become the child's legal property at the age of majority, financial aid formulas often treat student-owned assets less favorably than parent-owned assets, and the tax savings from shifting income to a child are capped once income exceeds the annual thresholds. Because thresholds, brackets, and student-status rules change from year to year and depend on individual facts, households with meaningful custodial or trust income for a child should consult current IRS publications or a qualified tax professional before assuming a shifting strategy will produce the expected savings.

This article is for general information and journalism purposes only and does not constitute tax or investment advice. Tax rules referenced here are subject to annual inflation adjustments and legislative change; readers should verify current-year figures directly with the IRS or a licensed tax professional.