What is the kiddie tax?

The kiddie tax is an IRS rule (IRC Section 1(g)) that taxes a child's unearned income above a threshold at the parents' marginal tax rate, rather than the child's lower rate. It was created to prevent parents from shifting investment income to children in lower tax brackets. In 2026, the threshold is $2,500.

How much unearned income can a child have before the kiddie tax applies?

In 2026, the first $1,250 of a child's unearned income is tax-free (covered by the standard deduction for dependents). The next $1,250 is taxed at the child's rate. Any unearned income above $2,500 is taxed at the parents' marginal rate (the kiddie tax rate).

At what age does the kiddie tax stop applying?

The kiddie tax stops applying when a child: (1) turns 18 years old, or (2) turns 19–23 and is a full-time student but earns more than half their own support. For children who are not full-time students, the kiddie tax no longer applies after age 18.

How do I report the kiddie tax?

The child's unearned income subject to the kiddie tax is calculated on Form 8615, which is attached to the child's tax return (if required to file) or included on the parents' return if the parents elect to include it. Children with only unearned income may be able to use Form 8814 to have the income reported on the parents' return instead.

Kiddie Tax 2026 — How Children's Investment Income Is Taxed

The kiddie tax is an IRS rule that prevents parents from avoiding income tax by shifting investment income to children in lower tax brackets. Under the kiddie tax (IRC Section 1(g)), a child’s unearned income above $2,500 in 2026 is taxed at the parents’ marginal rate — not the child’s potentially lower rate.

Key takeaway: The kiddie tax applies to children under 18, and under 19–23 if they’re full-time students who don’t provide more than half their own support. The first $2,500 of unearned income uses the child’s own rate.

The 2026 Kiddie Tax Thresholds

Amount of Unearned Income	Tax Rate Applied
$0 – $1,250	Tax-free (standard deduction for dependents)
$1,251 – $2,500	Child’s rate (typically 10–12%)
Over $2,500	Parents’ marginal rate (kiddie tax applies)

The $1,250 and $2,500 thresholds are indexed for inflation and typically adjust slightly each year. Confirm current amounts at IRS.gov.

What Counts as Unearned Income?

Unearned income includes income a child receives that is NOT from working:

Subject to kiddie tax:

Dividends (including qualified dividends in a taxable brokerage account)
Interest income (savings accounts, bonds, CDs)
Capital gains (from selling investments)
Rental income
Trust distributions
Royalties
Social Security benefits received by the child

NOT subject to kiddie tax (earned income):

Wages from a job
Self-employment income (babysitting, lawn mowing, freelance work)
Tips

Who the Kiddie Tax Applies To

The kiddie tax applies to a child who meets ALL of the following at year-end:

The child has unearned income above $2,500
The child is required to file a tax return
The child does not file a joint return
AND EITHER:
- The child is under 18 at year-end, OR
- The child is 18 at year-end, or a full-time student age 19–23, AND the child’s earned income doesn’t exceed half of their support

Practical example:

Your 16-year-old daughter received $4,000 in dividends from a custodial account → Kiddie tax applies to $1,500 ($4,000 − $2,500)
Your 22-year-old son is a full-time college student, has $3,000 in investment income, and his scholarship + your support covers more than half his costs → Kiddie tax applies
Your 22-year-old daughter works full-time, earns $35,000, and has $3,000 in investment income → Kiddie tax does NOT apply (her earned income exceeds half her support)

How the Kiddie Tax Is Calculated

Example:

Child’s unearned income: $5,000 (dividends and capital gains)
Child’s standard deduction: $1,250
Child’s taxable unearned income: $3,750 ($5,000 − $1,250)
Income at child’s rate: $1,250 ($2,500 − $1,250)
Income at parents’ rate: $2,500 ($3,750 − $1,250)
Parents’ marginal rate: 24%

Tax calculation:

On $1,250 at 10% (child’s rate): $125
On $2,500 at 24% (parents’ rate): $600
Total tax: $725

Without the kiddie tax, all $3,750 would be taxed at the child’s rate (likely 10–12%), saving $200–$300 in tax.

Reporting the Kiddie Tax

Option 1 — Child files Form 8615: The child files their own return and attaches Form 8615 (Tax for Certain Children Who Have Unearned Income). The parents’ taxable income and tax rate are entered to compute the child’s kiddie tax.

Option 2 — Parents use Form 8814: Parents can elect to include the child’s income on their own return using Form 8814 if the child’s gross income was only interest and dividends, and meets certain conditions. This simplifies filing but may increase the parents’ income for purposes of deduction phaseouts and ACA premium tax credits.

Strategies to Minimize the Kiddie Tax

Keep unearned income below $2,500 in custodial accounts — invest in growth assets that don’t generate current income (index funds with low dividends, growth stocks)
Use 529 plans for college savings — 529 earnings are tax-free when used for qualified education expenses; no kiddie tax
Roth IRA for working teens — if your child has earned income (wages, self-employment), they can contribute to a Roth IRA, building tax-free wealth without kiddie tax exposure
Shift to unrealized gains — buy and hold investments to defer capital gains until after the kiddie tax age limit
Wait until age 18/23 — in many cases, the simplest approach is accepting the kiddie tax for a few years, knowing it ends

Income Tax Guide — all income tax topics
Child Tax Credit — credit for having children
Roth IRA for Kids — building tax-free wealth for minors
Capital Gains Tax Rates — rates that apply above kiddie tax threshold

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

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