Key Points:
- The kiddie tax applies to dependent children with unearned income, such as interest or dividends, exceeding the annual IRS threshold.
- In 2026, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and anything over $2,700 is taxed at the parents’ marginal rate.
- Understanding the kiddie tax is essential for parents using custodial accounts or inherited IRAs to build generational wealth without unexpected tax bills.
Understanding Your Child’s Investment Income
At some point, you may start investing for your child’s future. However, if your child is the beneficiary of a UGMA/UTMA account, an inherited IRA, or other investment accounts, you need to ask: What is the kiddie tax?
This tax was specifically created to prevent parents from shifting their unearned income to their children to lower the family’s overall tax liability. By understanding the nuances of these rules, you can protect your family’s financial growth.
1. Who qualifies as a “Kiddie”?
Per the IRS, this tax applies to dependent children under age 19. Additionally, it can apply to full-time students ages 19–23 if their earned income does not provide more than half of their own support.
2. Earned vs. Unearned Income
It is vital to distinguish between types of income to determine the kiddie tax liability for your child:
- Earned Income: Wages from a job, tips, or self-employment (like shoveling snow or acting). For 2026, a dependent’s standard deduction for earned income is $16,100 (or earned income plus $450, whichever is greater, up to the standard limit).
- Unearned Income: Interest, dividends, capital gains, and taxable scholarships.
3. The 2026 Kiddie Tax Thresholds
For 2026, the IRS has adjusted the thresholds for inflation. Here is how unearned income is taxed:
- First $1,350: Tax-free (covered by the dependent’s limited standard deduction).
- Next $1,350: Taxed at the child’s individual tax rate (usually 10%).
- Over $2,700: Taxed at the parents’ marginal tax rate, which can be as high as 37%.
4. How to Calculate the Tax
To calculate the tax, you must determine the child’s “net unearned income.” You subtract the child’s standard deduction for dependents ($1,350 for 2026) from their total unearned income. The portion that exceeds the threshold is subject to the parents’ higher rate.
Example – What is the Kiddie Tax?:
Let’s look at Maya, a 16-year-old who worked a summer job and has a custodial brokerage account set up by her grandparents.
Maya’s 2026 Income:
Earned Income: $3,000 (from a summer lifeguarding job)
Unearned Income: $4,000 (dividends and capital gains from her UTMA account)
Total Gross Income: $7,000
Step 1: Calculate the Standard Deduction For a dependent in 2026, the standard deduction is the greater of $1,350 OR [Earned Income + $450].
Maya’s deduction: $3,000 + $450 = $3,450.
Maya’s Taxable Income: $7,000 – $3,450 = $3,550.
Step 2: Apply the Kiddie Tax Tiers to Unearned Income ($4,000) Even though Maya’s total taxable income is only $3,550, the IRS looks specifically at that $4,000 of investment money:
First $1,350: Tax-free (This is the portion of her standard deduction applied to unearned income).
Next $1,350: Taxed at Maya’s rate (usually 10%).
Remaining $1,300: This is the “excess” unearned income. It is subject to the Kiddie Tax and is taxed at her parents’ marginal rate (which could be as high as 37%).
The Result: Even though Maya made far less than the full $16,100 standard deduction, her family will still have to file Form 8615. The “kiddie tax” ensures that the last $1,300 of her dividends is taxed as if her parents had earned it themselves.
Note that your child’s investment income might also be subject to the 3.8% Net Investment Income Tax (NIIT).
5. Deductions and “OBBB” Changes
Under the 2026 tax laws, most children use the standard deduction rather than itemizing. For 2026, the standard deduction for a dependent with only unearned income is limited to $1,350. However, if the child has earned income, the deduction can be as high as the full single standard deduction of $16,100.
6. Filing Requirements and Form 8615
To report income subject to the tax, you must attach Form 8615 to the child’s tax return. This is required if:
- The child’s unearned income is more than $2,700.
- The child is required to file a return and does not file a joint return.
- At least one parent is alive at the end of the year.
If your child’s only income is interest and dividends totaling less than $13,500, you may be able to elect to report that income on your own return using Form 8814.
7. State Tax Implications
Not all states follow federal rules regarding what is the kiddie tax and how it is applied. Always check with your tax professional to see if your state recognizes these thresholds or applies its own separate tax on a child’s investment earnings.
8. Strategic Tax Planning
Providing passive income for your children is a brilliant way to build generational wealth, but it requires proactive planning. New options in 2026, such as the “Trump Child Savings Accounts” (which allow for tax-deferred growth similar to an IRA), provide new avenues to save for your child without immediate tax hits.
Also, don’t forget the gift tax when contributing to a custodial account that generates investment income. For this year, you can generally contribute up to $19,000 per person ($38,000 for married couples) without needing to file a gift tax return or tapping into your lifetime exemption.
Disclaimer: This material is for informational purposes only and is not intended as tax, legal, or accounting advice. Consult your own advisors before making significant financial commitments.
General Information Only: This content is prepared by The Little CPA for informational and educational purposes only. It does not constitute financial, tax, legal, or investment advice. While we strive for accuracy, the rapidly changing nature of tax laws—means this information may not apply to your specific situation.
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