Kiddie Tax

Posted on January 4, 2026

KIDDIE TAX

The kiddie tax aims to prevent parents from reducing their tax burden by shifting investment income to their children. The kiddie tax is a specific set of U.S. federal tax rules designed to prevent families from avoiding higher taxes by transferring investment assets to their children. It generally applies to a child's unearned income (like interest, dividends, and capital gains) above a certain threshold, taxing that excess amount at the parent's marginal tax rate instead of the child's lower rate. We can say that kiddie tax isn't a separate tax. Instead, it's a special set of tax rules established to prevent families from taking advantage of a tax loophole by using custodial accounts as a tax shelter.

Kiddie Tax 2025

For the 2025 tax year, the "kiddie tax" applies to a dependent child's unearned income (interest, dividends, capital gains, etc.)that exceeds $2,700. The first portion of the unearned income is tax-free up to $1,350 and the marginal tax rate will apply for unearned income between $1,350 and $2700. It is something that must be accounted for with income from investments, except for income that comes from 529 plans. The income form 529 plans can still be used for college without additional tax penalties.

The 2025 Kiddie tax allows the first $1,350 to be tax-free, taxes the next $1,350 at the child's marginal tax rate, and applies the parent's marginal rate to the rest.

Usually, taxpayers use custodial accounts (such as a child's savings or investment account) to gift assets to children and grandchildren is one way to potentially reduce your income taxes. This strategy allows you to shift income into the child's lower tax bracket while also removing assets from your taxable estate.

Marginal Tax Rates

Marginal tax rates currently range from 10% to 37% depending on your income.

Definition of a Child

The legislation defines a child as anyone who is under age 18 or a full-time student who is under age 24.

Definition of Unearned Income

For kiddie tax purposes, unearned income includes:

• Interest
• Dividends
• Capital gains
• Taxable scholarships
• Income produced by custodial accounts under the UGMA

Exceptions to the Kiddie Tax Rule:

The kiddie tax does not apply if a child:

• Has earned income that totals more than half of their support.
• Is married and files a joint tax return.
• Is a full-time student between 19 and 23 years old and has earned income that is greater than or equal to half of their support.

Meaning of Support:

• Support includes food, clothing, shelter, healthcare and tuition, while earned income includes wages, salaries, tips and other compensation for personal services.