Kiddie Tax Guide
The kiddie tax prevents parents from shifting large amounts of investment income to children to take advantage of their lower tax brackets. For 2025, the first $1,300 of a child's unearned income is tax-free, the next $1,300 is taxed at the child's rate, and anything above $2,600 is taxed at the parents' marginal rate.
Introduced by the Tax Reform Act of 1986, the kiddie tax applies to children under age 18, children who are 18 whose earned income doesn't exceed half their support, and students aged 19-23 whose earned income doesn't exceed half their support. The rules ensure that parents can't simply gift appreciated assets to children to have gains taxed at 0% or 10% rather than their own higher rates.
For example, suppose a 15-year-old has $5,000 in unearned income from investments gifted by parents. The first $1,300 is tax-free (using the standard deduction for dependents). The next $1,300 is taxed at the child's rate (likely 10%). The remaining $2,400 is taxed at the parents' marginal rate — say 24%. The parents would owe $576 on that portion. The strategy of giving securities to children is far less beneficial than many assume.
However, there are still planning opportunities. If a child has earned income from a job, that income is always taxed at the child's rate, not the parents' rate. Earnings from a summer job saved in a Roth IRA grow tax-free. Additionally, 529 plan accounts owned by a parent are not subject to kiddie tax rules and grow tax-deferred for qualified education expenses.
Net Investment Income and the Kiddie Tax
The 3.8% Net Investment Income Tax (NIIT) can also apply to children with high unearned income. However, because most children won't exceed the $200,000 AGI threshold, this is rarely a factor. The more immediate concern is the parents' bracket being applied to investment income above $2,600, which can turn a 0% or 15% capital gains rate on a child's return into the parents' higher rate.
FAQs
Does the kiddie tax apply to custodial accounts (UGMA/UTMA)?
Yes. Income generated within a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account is subject to kiddie tax rules. The account is owned by the child but managed by a custodian, so investment income is reported on the child's tax return and subject to the same thresholds.
How do I avoid the kiddie tax?
Strategies include: investing in growth stocks that don't pay dividends (deferring gains), using 529 plans for college savings, having the child earn income through a job (which is always taxed at their rate), or using U.S. Series I or EE savings bonds which defer taxation. The simplest approach is to keep unearned income under $2,600 per child per year.
What is Form 8615?
Form 8615, "Tax for Certain Children Who Have Unearned Income," must be filed for any child subject to the kiddie tax. It calculates the tax on the child's unearned income using the parents' tax rate. The form requires the parents' tax information, which adds complexity to filing. Many tax software packages handle this automatically.