The Kiddie Tax Explained: How a Child's Investment Income Is Taxed

The kiddie tax is a federal rule that taxes a child's investment income above a set threshold at the parent's tax rate instead of the child's usually lower rate. For 2026, the IRS sets that threshold at $2,700 of unearned income. In most cases, the first $1,350 of a child's investment income is tax-free, the next $1,350 is taxed at the child's own rate, and anything above $2,700 is taxed at the parent's rate if that rate is higher. Wages from a job are not affected.

The rule exists to stop families from cutting their tax bill by moving investments into a child's name. It still leaves room for modest custodial accounts and savings to grow with little or no tax, and there are legitimate ways to plan around it. Here is how it works, who it covers, how to file, and the planning moves that make a difference.

The kiddie tax covers more than young children

Despite the name, it can apply to teenagers and college students. According to the IRS instructions for Form 8615, the rules apply to a child who had more than $2,700 of unearned income in 2026, is required to file a return, and meets one of three age conditions at the end of the year. The child was under 18. Or the child was 18 and did not have earned income of more than half of their own support. Or the child was a full-time student at least 19 and under 24 and did not have earned income of more than half of their own support.

At least one parent must be living, and the child cannot be filing a joint return. A college student who earns enough from work to cover more than half of their support falls outside the rule, as does a 19-year-old who is not a student.

Unearned income means investment-type income

Unearned income generally includes interest, dividends, capital gains, and capital gain distributions from funds, along with other income that is not pay for work, such as rents, royalties, taxable distributions from trusts, and taxable distributions from inherited retirement accounts. Earned income, such as wages from a summer job or net earnings from babysitting or a small business, is not subject to the kiddie tax.

This distinction matters because a teenager with both a job and a custodial brokerage account is taxed in two different ways. The paycheck is taxed at the teen's own rates. The investment income above the threshold may be taxed at the parent's rate.

The first $1,350 is tax-free

For 2026, IRS Revenue Procedure 2025-32 limits the standard deduction for someone who can be claimed as a dependent to the greater of $1,350 or their earned income plus $450. A child with only investment income gets a $1,350 standard deduction, which shelters the first $1,350 of unearned income from tax.

If the child also has a job, the standard deduction can be larger, which helps shelter wages. It does not raise the $2,700 kiddie tax threshold for a child who does not itemize.

The next $1,350 is taxed at the child's rate

Income between $1,350 and $2,700 is taxed at the child's own rates, which for most children means the lowest bracket. If that income is qualified dividends or long-term capital gains, the child's rate may be 0%.

Everything above $2,700 is taxed at the parent's rate

This is the kiddie tax itself. The amount above $2,700, called net unearned income, is taxed as if it were added on top of the parent's taxable income, using the parent's marginal rate if it is higher. If the excess is qualified dividends or long-term gains, the parent's capital gains rate applies to it.

A bit of history explains old articles you may find. From 2018 through 2019, the Tax Cuts and Jobs Act taxed this income using the steep trust and estate brackets. The SECURE Act of 2019 restored the parent's rate starting in 2020, which is the rule today.

A worked example: one account, two outcomes

Ava is 12 and has a custodial account that produces $5,000 of investment income in 2026. Her parents file jointly and are in the 24% bracket. To keep the math simple, assume Ava has no other income.

If the $5,000 is all interest, the first $1,350 is covered by her standard deduction. The next $1,350 is taxed at her rate of 10%, which is $135. The remaining $2,300 is taxed at her parents' 24% rate, which is $552. Her total federal tax is about $687.

If the same $5,000 is all qualified dividends and long-term capital gains, the picture improves. The middle $1,350 likely falls in the 0% capital gains bracket on Ava's return. The top $2,300 is taxed at her parents' capital gains rate, likely 15%, for about $345. Same dollar amount, roughly half the tax, purely because of the type of income.

These are simplified illustrations. Real returns can include state taxes and other factors.

Whose tax rate counts depends on the family's filing setup

The Form 8615 instructions spell out which parent's return to use. If the parents are married and file jointly, use the joint return. If they are married but file separately, use the return of the parent with the greater taxable income. If the parents are divorced or legally separated, use the return of the parent who had custody for the greater part of the year. If that custodial parent has remarried and files jointly with the new spouse, the joint return with the stepparent is used, not the noncustodial parent's return. Parents who never married but lived together all year use the return of the parent with the greater taxable income.

Siblings are linked as well. When a parent has more than one child subject to the kiddie tax, the calculation takes into account the net unearned income of all of those children, so each child's tax reflects the family total. If one child's numbers are not ready by the filing deadline, the instructions suggest requesting an extension rather than guessing. And if a parent's return is later changed, the children's returns may need amending too.

In practice, this means the child's return cannot be finished until the parents' taxable income is known. Many families prepare the parents' return first, then the children's.

There are two ways to file

The default is for the child to file their own return with Form 8615 attached, which calculates tax on the net unearned income at the parent's rate. You will need the parent's taxable income and filing status to complete it.

The alternative is Form 8814, which lets a parent report the child's income on the parent's own return so the child does not have to file. Per the 2026 instructions, the election is available only if the child was under 19, or under 24 if a full-time student, at the end of the year, had income only from interest and dividends including capital gain distributions and Alaska Permanent Fund dividends, had gross income less than $13,500, and had no estimated tax payments or withholding. The child must not file a joint return, and the child's income must be more than $1,350.

Choosing between Form 8615 and Form 8814

Form 8814 is simpler, because there is one return instead of two. But it can cost more. The IRS instructions warn that if the child received qualified dividends or capital gain distributions, you may pay up to $135 more tax using the election, because the child's income between $1,350 and $2,700 is taxed at 10% instead of possibly 0% on the child's own return.

Adding the child's income to your return also raises your adjusted gross income. That can affect AGI-sensitive items on your return, such as certain credits, deductions with income limits, and IRA deduction eligibility. If your income is near a phase-out, filing a separate return for the child may be the better choice.

As a rule of thumb, the election tends to suit families with modest interest income and incomes well away from phase-out ranges. Separate returns tend to suit children with qualified dividends or capital gains, or parents whose AGI is close to a threshold.

Planning moves that work within the rules

Favor growth over income in custodial accounts. Broad stock index funds with low dividend yields generate little taxable income each year. Gains are taxed only when you sell, so you control the timing.

Realize gains in low-income years. Selling enough each year to use up the $1,350 tax-free amount and the child-rate band can gradually reset the account's cost basis at little or no tax. Once a child ages out of the kiddie tax, gains can be taxed at the child's own rates.

Use a 529 plan for education savings. Earnings inside a 529 plan grow tax-deferred, and withdrawals for qualified education expenses are tax-free federally, so they do not create kiddie tax income. Many families keep college money there rather than in a custodial account.

Consider a custodial Roth IRA if the child has earned income. Contributions are limited to the lesser of the child's earned income or the annual IRA limit, and qualified growth is tax-free, outside the kiddie tax.

Think about savings bond timing. Interest on Series EE and I savings bonds is subject to federal tax, but TreasuryDirect lets the owner choose between reporting the interest each year or waiting until the bond is cashed. For bonds owned by a child with little other income, reporting the interest annually can use up the tax-free $1,350 each year instead of piling a large amount of interest into a single year that may push the child over $2,700. Once you choose to report annually, that choice generally applies to the child's bonds going forward, so decide deliberately.

Mind the financial aid trade-off. Assets in a child's custodial account belong to the child irrevocably and are generally counted as student assets on the FAFSA, which can reduce aid more than parent assets would.

Common mistakes to avoid

Forgetting that the child may need to file. A dependent child with more than $1,350 of unearned income in 2026 generally must file a federal return, unless a parent elects Form 8814.

Overlooking reinvested dividends and fund distributions. They are taxable even if the cash never left the account. Check every Form 1099 in the child's name.

Ignoring the support test for older children. A 20-year-old college student who covers less than half of their own support with earned income is still subject to the rule.

This article is general education, not tax advice. Thresholds adjust for inflation, so confirm the current figures in the IRS instructions for Forms 8615 and 8814 each year.

The bottom line

Keep a child's annual investment income near or below $2,700 when you can, tilt custodial accounts toward low-dividend growth, and use a 529 for college money. If the income is mostly qualified dividends or gains, file a separate return for the child with Form 8615 rather than electing Form 8814.