Kiddie Tax Guide - Unearned Income Rules

Kiddie Tax Guide

The “kiddie tax” prevents income-shifting to children by taxing their unearned income at their parents’ tax rate. Understand the rules and plan accordingly.

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What is the Kiddie Tax?

The kiddie tax applies to a child’s unearned income (investment income) when:

• The child is under age 18, OR
• Age 18 with earned income less than half their support, OR
• Age 19-23, a full-time student, with earned income less than half their support

AND the child has unearned income above certain thresholds.

How It Works

2025 Thresholds:

• First $1,300 of unearned income: Tax-free (child’s standard deduction)
• Next $1,300 of unearned income: Taxed at child’s rate (usually 10%)
• Unearned income over $2,600: Taxed at parent’s marginal rate

Unearned Income Includes

• Interest
• Dividends
• Capital gains
• Taxable distributions from trusts
• Rental income (if the child is passive)

Earned Income NOT Subject to Kiddie Tax

• Wages
• Self-employment income
• Taxable scholarship income

Filing Requirements

Form 8615 - Tax for Certain Children Who Have Unearned Income

Must be filed if:

• Child has more than $2,600 of unearned income, AND
• Meets age requirements, AND
• Is required to file a return

Parent’s Election (Form 8814)

Parents may elect to report child’s income on their own return if:

• Child’s income is only interest and dividends
• Less than $13,000 of income
• No estimated tax payments or withholding

Planning Strategies

529 Plans

• Earnings grow tax-free
• Distributions for qualified education expenses are tax-free
• Not subject to kiddie tax

Roth IRA for Children

• Children can contribute earned income
• Tax-free growth
• Distributions not subject to kiddie tax

Timing of Income

• Defer capital gains until child is no longer subject to kiddie tax
• Be cautious with UTMA/UGMA custodial accounts

I Bonds & EE Bonds

• Interest can be deferred
• May qualify for education exclusion

Common Situations

Custodial Accounts (UTMA/UGMA)

Many parents establish custodial accounts for children, but these accounts can trigger substantial kiddie tax if they generate significant unearned income.

529 vs Custodial Accounts

529 plans are generally more tax-efficient than custodial accounts for college savings due to tax-free growth and avoiding kiddie tax.

Related Resources

• Education Planning

Family Tax Planning

The kiddie tax is just one consideration in family tax planning. Contact us for comprehensive strategies.