The kiddie tax applies to certain children under age 19, and some full-time students under age 24, who earn investment income such as dividends, interest, or capital gains. In 2026, the first $1,350 of a child’s unearned income is generally tax-free, the next $1,350 is taxed at the child’s rate, and amounts above $2,700 may be taxed at the parents’ higher marginal tax rate. Understanding these rules can help families plan strategically for custodial accounts, inherited IRAs, and other investments while avoiding unexpected tax consequences.
- The kiddie tax is a federal rule that can tax a child’s net unearned income (interest, dividends, etc.) above the annual threshold at the parent’s rate.
- Income subject to the kiddie tax is reported on Form 8615 (or Form 8814 if income is below threshold and parents make the applicable election).
- In addition to the kiddie tax, parents using investment accounts to strategically tax plan while building generational wealth should be aware of the gift tax and net investment income tax.
What is the Kiddie Tax?
Many parents and grandparents invest money for a child’s future through savings or investment accounts. But once a child starts earning investment income (such as interest, dividends, or capital gains), a special tax rule known as the “kiddie tax” may apply.
These rules were created to stop families from moving investment income into a child’s name simply to pay lower taxes, so understanding them can help you avoid surprises and plan more effectively for your family’s future.
1. Who qualifies as a “Kiddie”?
Per the IRS, this tax applies to certain children under age 23. Here are the specifics:
- had more than $2,700 of unearned income,
- is required to file a tax return,
- was under age 18, or age 18 without earned income exceeding half of support, or a full-time student age 19–23 without earned income exceeding half of support,
- had at least one living parent at year-end,
- and did not file a joint return.
For example, a 20-year-old college student who earns $8,000 from a part-time job but receives most of their support from parents or grandparents could still fall under the kiddie tax rules if they also have investment income from a custodial account or inherited investments.
2. Earned vs. Unearned Income
The kiddie tax applies to unearned income. Earned income has its own set of tax rules. Here’s the difference:
- Earned Income: Wages from a job, tips, or self-employment (like shoveling snow or acting).
- Unearned Income: Interest, dividends, capital gains, unemployment income, certain taxable scholarships and other types of income.
3. The 2026 Kiddie Tax Thresholds
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. Deductions Against the Kiddie Tax
Deductions Against Unearned Income
If a child only has unearned income (such as interest, dividends, unemployment income or capital gains), the first $1,350 is generally tax-free. The next $1,350 is usually taxed at the child’s rate, and any amount above roughly $2,700 may be taxed at the parent’s rate under the “kiddie tax” rules.
Deductions Against Earned Income
If the child has earned income from working (like babysitting, a part-time job, or a summer job), they may qualify for a much larger tax-free amount. For 2026, the standard deduction is $16,100, which means a child can typically earn up to that amount without owing federal income tax.
There’s an important detail: if the child earns less than the full standard deduction, their deduction is generally limited to their earned income plus $450. In practical terms, most working children won’t owe federal income tax unless their earnings exceed the standard deduction.
Keep in mind that even if a child doesn’t owe income tax, they may still need to file a return or pay payroll taxes (such as Social Security and Medicare), depending on how they are paid.
5. How to Calculate the Tax
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.
In the above example, Maya will generally need Form 8615 because:
- she has more than $2,700 of unearned income,
- she is under age 18,
- she is required to file a return,
- and at least one parent is alive
Note: 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.
Tax-friendly Accounts
529-to-Roth IRA rollovers, Trump Accounts and other tax-deferred accounts provide avenues to save for your child without immediate tax hits. Discuss these with a Certified Financial Planner to determine if they are a right fit for your generational wealth goals.
→ Related: College Savings Accounts for Kids: 4 Popular Options
Net Investment Income Tax
As if kiddie tax wasn’t enough, some children’s income could also be subject to the Net Investment Income Tax (NIIT), which is an additional 3.8% federal tax on the lesser of
- certain investment earnings like dividends, interest, capital gains, and rental income, or
- or Modified Adjusted Gross Income above the threshold.
→ Related: Investing 101: 5 Things Every Modern Investor Needs to Consider
When does the NIIT apply? The tax generally kicks in when a child has investment income and their modified adjusted gross income (MAGI) exceeds the IRS threshold for the tax. NIIT can also apply when parents elect to report a child’s investment income on their own tax return using Form 8814, because that income is added to the parents’ MAGI and could push them above the NIIT income limits.
| Filing Status | Threshold Amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household (with qualifying person) | $200,000 |
| Qualifying widow(er) with dependent child | $250,000 |
Taxpayers should be aware that these threshold amounts are not indexed for inflation.
Gift Tax
Also, don’t forget the gift tax when contributing to a custodial account that generates investment income. For 2026, 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.
Please note the $19,000 exclusion may not be applicable depending on the type of gift, trust provisions (if gifted into a trust) and much more. Discuss with a qualified tax professional and estate planning attorney before making the gift.
Frequently Asked Questions About the Kiddie Tax
What is the kiddie tax?
The kiddie tax is a federal tax rule that applies to certain children with investment income, such as dividends, interest, capital gains, and certain taxable scholarships. The rule prevents parents from shifting investment income into a child’s name to take advantage of lower tax brackets.
At what age does the kiddie tax apply?
The kiddie tax generally applies to children under age 18, certain 18-year-olds who do not provide more than half of their own support, and full-time students ages 19–23 who also do not provide more than half of their own support through earned income.
What counts as unearned income for kiddie tax purposes?
Unearned income includes investment-related income such as interest, dividends, capital gains, rental income, taxable scholarships, and certain trust distributions. Wages from a job, self-employment income, and tips are considered earned income instead.
How much unearned income can a child have before the kiddie tax applies in 2026?
For 2026, the first $1,350 of a child’s unearned income is generally tax-free, and the next $1,350 is usually taxed at the child’s tax rate. Unearned income above $2,700 may be taxed at the parents’ marginal tax rate under the kiddie tax rules.
Does a child with investment income need to file a tax return?
A child may need to file a federal tax return if their unearned income exceeds IRS filing thresholds or if they owe kiddie tax. In many cases, children with more than $2,700 of unearned income will need to file Form 8615 with their tax return.
Can parents report a child’s investment income on their own tax return?
Possibly. Parents may be able to report a child’s interest and dividend income on their own tax return using Form 8814 if the child’s only income is qualifying investment income and it falls below the IRS limit. However, making this election can increase the parents’ modified adjusted gross income (MAGI) and potentially trigger additional taxes like the Net Investment Income Tax (NIIT).
The Bottom Line: What is the Kiddie Tax?
The kiddie tax can create unexpected tax consequences for families investing on behalf of their children, especially when investment income begins to grow over time. Understanding how earned income, unearned income, Form 8615, NIIT, and custodial account rules work together can help families make smarter long-term financial decisions.
Before transferring significant assets or setting up investment accounts for a child, consider speaking with a qualified tax professional to ensure your strategy aligns with both your tax and estate planning goals.
Disclaimer
Please note that the financial advice and information presented on this blog are not personalized to your specific financial circumstances. This post is for informational purposes only and is not tax, legal, accounting, or investment advice. The Little CPA does not create a professional-client relationship by publishing this content. Please consult a qualified professional before making decisions based on this information. Any reliance you place on the information provided is strictly at your own risk.
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