Curated by: Rubric Advisors
Tax Planning
Kiddie Tax Rules: What Parents and Grandparents Need to Know
The kiddie tax applies a parent's tax rate to a child's unearned income above certain thresholds, affecting UGMA/UTMA accounts and investment gifts.
Kiddie Tax Rules: What Parents and Grandparents Need to Know
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What Is the Kiddie Tax?
- A federal tax rule that taxes a child's unearned income (dividends, interest, capital gains) at the parent's marginal rate
- Designed to prevent parents from shifting investment income to children in lower tax brackets
- Applies to children under age 19, or under age 24 if they are full-time students
- Only affects unearned income, a child's wages from a job are taxed at the child's own rate
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Full Guide
What Is the Kiddie Tax?
- A federal tax rule that taxes a child's unearned income (dividends, interest, capital gains) at the parent's marginal rate
- Designed to prevent parents from shifting investment income to children in lower tax brackets
- Applies to children under age 19, or under age 24 if they are full-time students
- Only affects unearned income, a child's wages from a job are taxed at the child's own rate
Income Thresholds (2025)
- The first $1,350 of a child's unearned income is tax-free (covered by the standard deduction)
- The next $1,350 is taxed at the child's own rate, typically the lowest bracket
- Unearned income above $2,700 is taxed at the parent's marginal tax rate
- These thresholds are adjusted annually for inflation, always confirm the current year's numbers
Who Is Subject to the Kiddie Tax?
- Children under 19 at year-end who have unearned income above the threshold
- Full-time students under age 24 whose earned income does not exceed half their support
- The rule does not apply once a child turns 19 (or 24 for students), they file at their own rate
- Married children who file a joint return are generally exempt from the kiddie tax
Impact on UGMA and UTMA Accounts
- Custodial accounts (UGMA/UTMA) are a common way to save and invest for children
- Investment earnings inside these accounts count as the child's unearned income
- Large custodial account balances can generate enough income to trigger the kiddie tax
- Once the child reaches the age of majority, the assets belong to them, with no restrictions on use
Strategies to Minimize the Kiddie Tax
- Invest in municipal bonds, interest is federally tax-exempt and does not count as taxable unearned income
- Hold growth-oriented stocks that pay little or no dividends, deferring gains until the child is older
- Consider 529 plans instead, earnings grow tax-free and are not subject to the kiddie tax
- Time asset sales so capital gains are realized after the child ages out of kiddie tax rules
Filing Requirements and Form 8615
- Form 8615 is required when a child's unearned income exceeds the kiddie tax threshold
- Parents can alternatively elect to report the child's income on their own return using Form 8814
- Form 8814 is simpler but may push the parent into a higher bracket or trigger other phase-outs
- Keep detailed records of cost basis for custodial account investments to ensure accurate reporting
Planning Considerations for Families
- Coordinate gifting strategies with grandparents to avoid unexpectedly large unearned income for children
- Review custodial account allocations annually, rebalancing into tax-efficient holdings can reduce the tax hit
- Compare the kiddie tax cost against alternatives like irrevocable trusts or 529 contributions
- Work with a tax advisor before making large gifts to minors, the kiddie tax can erode the intended benefit
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