Congress calls it the “kiddie tax,” and it does exactly what the name suggests: it stops parents from parking investment accounts in a child’s name to dodge higher tax brackets. If your child has more than a small amount of interest, dividends, or capital gains in a given year, part of that income gets taxed at your marginal rate instead of the child’s — even though it’s the child’s Social Security number on the account. For 2026, the first $1,350 of unearned income is tax-free, with the next $1,350 taxed at the child’s own rate, and anything above that taxed at the parent’s rate.
How the Kiddie Tax Actually Works
The rule targets unearned income — interest, dividends, capital gains, rents, and royalties. It does not touch wages from a summer job or gig work; that income is always taxed at the child’s own rate, no matter how much the child earns, according to the IRS Instructions for Form 8615.
Who It Applies To
The kiddie tax can apply to a child if all three of these are true:
- The child is under 19 at the end of the year, or under 24 and a full-time student.
- The child doesn’t provide more than half of their own support from earned income (this support test applies only to children age 18 or older, including full-time students age 19-23; it does not apply to children under 18).
- At least one parent is alive at year-end (the tax uses the parent’s rate as the benchmark, even if the child files separately).
There’s no lower age limit tied to the child’s own earnings — a 10-year-old with a custodial brokerage account is just as subject to this rule as a 20-year-old college student with a trust distribution.
The Three-Tier Structure
Congress built the kiddie tax as a layered system rather than a flat rule, which is why the math trips people up. A child’s unearned income gets split into three bands:
- First band (tax-free): Covered by the child’s standard deduction for unearned income.
- Second band (child’s rate): Taxed at the child’s own, usually low, tax bracket.
- Everything above that (parent’s rate): Taxed as if it were added on top of the parent’s income, at the parent’s marginal tax rate — which can run as high as 37% for high earners.
This is why a grandparent’s well-meaning gift of dividend-paying stock can backfire: once the child’s unearned income clears the second threshold, the tax bill on the excess is calculated using the parents’ bracket, not the child’s.
The 2026 Thresholds at a Glance
The dollar amounts are indexed for inflation and can change from year to year, so the IRS publishes updated figures each fall in its annual inflation-adjustment revenue procedure. The IRS published the official 2026 figures in Revenue Procedure 2025-32, and they are unchanged from 2025. Confirm details in the IRS Instructions for Forms 8615 and 8814 before you file.
| Unearned income range (2026) | How it’s taxed |
|---|---|
| $0 – $1,350 | Not taxed (covered by the child’s standard deduction) |
| $1,350 – $2,700 | Taxed at the child’s own rate |
| Above $2,700 | Taxed at the parent’s marginal rate |
The 2025 figures were also $1,350 and $2,700; Rev. Proc. 2025-32 left both amounts unchanged for 2026.
A Worked Example: The Jensen Family
Say the Jensens opened a custodial brokerage account for their 14-year-old, funded years ago with birthday and holiday money from grandparents. In 2026, that account generates $4,000 in dividends and realized capital gains. The parents’ combined marginal federal tax rate is 24%.
Here’s how the $4,000 gets sliced, using the 2026 thresholds above:
- First $1,350: tax-free, covered by the child’s unearned-income standard deduction.
- Next $1,350 (from $1,350 to $2,700): taxed at the child’s rate — likely 10%, so about $135 in tax.
- Remaining $1,300 (above $2,700): taxed at the parents’ 24% rate, so about $312 in tax.
Total tax on the account: roughly $447, most of it landing at the parents’ rate rather than the child’s. If the same $4,000 had been earned directly by the parents as ordinary dividend income taxed at 24% across the board, the tax would have been $960 — so the kiddie tax still gives some benefit over holding the asset in the parent’s name outright, just far less than if the whole amount were taxed at the child’s low bracket.
Reporting the Income: Form 8615 or Form 8814
Parents have two main paths for handling this on a tax return, and the right one depends on the type and amount of income involved.
- Form 8615 (“Tax for Certain Children Who Have Unearned Income”) is filed with the child’s own tax return. The child reports all their income — earned and unearned — and this form calculates the portion taxed at the parent’s rate.
- Form 8814 (“Parents’ Election to Report Child’s Interest and Dividends”) lets parents skip filing a separate return for the child by including the child’s interest and dividend income directly on the parents’ own Form 1040. This election is only available if the child’s income is entirely interest and dividends (no capital gains distributions beyond certain limits, no earned income) and falls under a yearly cap that IRS.gov publishes each year — for both 2025 and 2026 the child’s gross income must be less than $13,500.
Choosing Form 8814 is simpler paperwork-wise, but it can sometimes produce a slightly different (and occasionally higher) tax result than filing a separate return for the child, because it changes the parents’ adjusted gross income, which can affect things like itemized deduction phaseouts or eligibility for other credits. The IRS instructions for Form 8615 and Form 8814 walk through both methods.
Ways Families Manage the Impact
The kiddie tax doesn’t mean custodial accounts or 529 plans are a bad idea — it just changes the math parents should run before choosing where to hold an asset.
- 529 college savings plans aren’t affected at all by the kiddie tax, since qualified withdrawals for education expenses aren’t taxable income in the first place.
- U.S. savings bonds can qualify for the education savings bond interest exclusion, but the bond must be registered in the adult’s name — the owner must be at least 24 when the bond is issued, so a bond registered with the child as owner will not qualify. Income limits also apply; see TreasuryDirect.gov.
- Timing capital gains matters. If a custodial account needs to sell appreciated stock, spreading sales across years can help keep the child under the second-tier threshold in any single year.
- Roth IRAs for working teens are a separate strategy: earned income from a job isn’t subject to the kiddie tax at all, and contributing it to a Roth IRA grows tax-free long-term, regardless of these thresholds.
None of this is a reason to avoid saving for your kids — it’s a reason to think about which account holds which asset.
FAQ
Does the kiddie tax apply to money in a 529 plan?
No. The kiddie tax only applies to taxable unearned income like interest, dividends, and capital gains. Qualified 529 withdrawals used for tuition, books, and other approved education expenses are not taxable, so they never enter into the kiddie tax calculation.
What if my child also has a part-time job?
Earned income from a job is taxed at the child’s own rate no matter how much they make — there’s no kiddie tax on wages. Only the unearned income (interest, dividends, capital gains) from savings or investment accounts is subject to these rules, and it’s calculated separately from any wages the child reports.
Do I have to file a separate tax return for my child?
Not necessarily. If your child’s income is limited to interest and dividends and stays under the yearly cap the IRS sets (gross income under $13,500 for both 2025 and 2026), you can often use Form 8814 to report it directly on your own return instead of filing a separate one for the child. If the income is higher or includes other types, the child typically needs to file their own return using Form 8615.
Sources
- IRS.gov — Instructions for Form 8615: https://www.irs.gov/forms-pubs/about-form-8615
- IRS.gov — Instructions for Form 8814: https://www.irs.gov/forms-pubs/about-form-8814
- IRS.gov — Topic no. 553, Tax on a child’s investment and other unearned income (kiddie tax): https://www.irs.gov/taxtopics/tc553
- IRS.gov — Annual Inflation Adjustments: https://www.irs.gov/newsroom
- TreasuryDirect.gov — Education Planning with Savings Bonds: https://www.treasurydirect.gov
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