Kiddie Tax Rules — Unearned Income of Children Taxed at Parent's Rate

The kiddie tax is designed to prevent a simple income-shifting strategy: giving investment assets to children who pay little or no tax, collecting investment income at the child's low tax rate, and avoiding the parent's higher marginal rate on that income. Under § 1(g) of the Internal Revenue Code, a child's "net unearned income" — dividends, interest, capital gains, and other investment income above a threshold — is taxed at the parent's marginal rate rather than the child's. In 2026, the first $1,350 of a child's unearned income is tax-free (covered by the child's standard deduction), the next $1,350 is taxed at the child's own rate, and anything above $2,700 is taxed at the parent's rate. For a child in a college savings account with appreciated stock or UGMA/UTMA investments generating significant dividends, this rule means meaningful investment income may effectively get no rate benefit from being in the child's name. The kiddie tax applies through age 18 unconditionally, and continues through age 23 for full-time students whose earned income doesn't cover more than half their support.

Current Law (2026)

Parameter	Value
Core statute	26 U.S.C. § 1(g)
Who it applies to	Children under 18; OR ages 18-23 if full-time student AND earned income ≤ 50% of support
Exceptions	Child is married and files jointly; both parents are deceased at year-end
Net unearned income threshold (2026)	First $1,350: covered by standard deduction (tax-free); next $1,350: taxed at child's rate; above $2,700: taxed at parent's rate
"Net unearned income" defined	Unearned income (investment income) minus the greater of: (a) $1,350 plus itemized deductions directly connected to producing that income, or (b) $2,700 total
Unearned income includes	Dividends, interest, capital gains, rents, royalties, trust distributions, taxable scholarship income above tuition
Earned income excluded	Wages, salaries, self-employment income, taxable scholarships for services — all taxed at the child's own rate
Parent's rate	The kiddie tax is computed at the parent's marginal rate, including the parent's capital gains rate and NIIT exposure
Filing	Child files Form 8615 with their own return if net unearned income exceeds $2,700; parent's SSN required
Parent election	Parent may elect to include child's income on parent's return using Form 8814 if child's gross income is less than $13,500 (2026) and all income is dividends/interest/capital gains — but parent pays tax at their rates on the full amount

Legal Authority

26 U.S.C. § 1(g)(1) — The kiddie tax: if the subsection applies, the child's tax is the GREATER of (a) the tax on the child's taxable income at the child's own rates, OR (b) the tax on non-unearned income at the child's rates, PLUS the child's allocable share of the parental tax on all net unearned income
26 U.S.C. § 1(g)(2) — Who it applies to: (A) child who has not attained age 18, OR is age 18-23 and a full-time student whose earned income doesn't exceed half their support; (B) at least one parent alive at year-end; (C) child does not file jointly
26 U.S.C. § 1(g)(3) — Allocable parental tax: the excess of the tax the parent would pay if the parent's income included all qualifying children's net unearned income, over the tax the parent pays on their own income — this excess is allocated proportionally among the children
26 U.S.C. § 1(g)(4) — Net unearned income: the portion of AGI not attributable to earned income, minus the standard deduction limit for dependents ($1,350 for 2026), minus the greater of $1,350 or itemized deductions connected to the income
26 U.S.C. § 1(g)(5) — Which parent's rate: for unmarried parents, the custodial parent's rate; for married filing separately, the spouse with the higher taxable income; for married filing jointly, the joint return

How the Kiddie Tax Calculation Works

The kiddie tax calculation is straightforward once you understand the three tiers:

Tier 1 — Tax-free: The child's standard deduction for a dependent reduces the first $1,350 (2026) of unearned income to zero — no tax.

Tier 2 — Child's own rate: The next $1,350 of net unearned income is taxed at the child's own rates, which may be 0% for capital gains or 10% for ordinary income if the child has no other substantial income.

Tier 3 — Parent's rate: Net unearned income above $2,700 is the "allocable parental tax" zone — taxed at the parent's marginal rates, including the parent's long-term capital gains rate (potentially 20% + 3.8% NIIT for high-earning parents).

The calculation on Form 8615:

Determine the parent's taxable income (the parent must share this information with the child)
Add the child's net unearned income to the parent's taxable income — compute the tax on that combined amount
The difference between Step 2 and the tax on the parent's income alone is the "allocable parental tax"
The child's tax = the child's own tax on non-unearned income + the child's share of the allocable parental tax
If the child's tax computed this way is LESS than the child's tax would be at the child's own rates on all income, the child pays the normal rate (the "greater of" rule ensures it's always at least what the child would otherwise owe)

Age Rules: Who Is Subject

Always subject: Any child who has not reached age 18 by December 31 of the tax year, if at least one parent is alive.

Subject through age 23 (the "student extension"): A child who is:

Age 18 or is a full-time student ages 19-23, AND
Has earned income that does not exceed half of the child's support for the year

The support test means: if a 20-year-old college student earns $3,000 in summer wages but parents pay $25,000 for tuition and living expenses, the student's earned income ($3,000) is less than half of total support ($28,000 ÷ 2 = $14,000) — kiddie tax applies.

Age 18 exception: If a child turns 18 in the tax year AND their earned income exceeds half their support (e.g., an 18-year-old working full-time after high school graduation), the kiddie tax doesn't apply.

No longer subject: Age 24+, or a child who files a joint return, or a child whose earned income exceeds half their support (regardless of age within the covered range).

Why This Matters for Tax Planning

UGMA/UTMA accounts: Custodial accounts (see also Section 2503(c) Trusts as an alternative) funded with appreciated stock or dividend-paying investments generate unearned income — exactly what the kiddie tax targets. For a parent in the 37% bracket, dividends that would be taxed at 20% at the child's "own" rate actually get taxed at the parent's 20% qualified dividend rate regardless, so there's no savings. But if the parent is in the 0% capital gains bracket (taxable income under $96,700 for MFJ in 2026), the kiddie tax doesn't hurt.

College savings alternatives: The kiddie tax makes 529 plans relatively more attractive for college savings — earnings inside a 529 grow tax-deferred and distributions for qualified education expenses are tax-free, entirely avoiding the kiddie tax regime.

UTMA/UGMA liquidation timing: If a child will reach an age where the kiddie tax no longer applies (age 18 with substantial earned income, or age 24+), it can make sense to defer realizing gains in custodial accounts until after that date.

Earned income is fully protected: If your child earns wages working a summer job, that income is taxed at the child's own rate — not the parent's. A high school student earning $8,000 mowing lawns pays tax on those wages at the child's 10% bracket (or possibly $0 after the standard deduction), regardless of the parent's rate. The kiddie tax only applies to unearned income.

Trust income: Distributions from trusts to children that are classified as unearned income (dividends, interest, capital gains passed through from a trust) are subject to the kiddie tax in the same way as custodial account income.

How It Affects You

If you have a UGMA/UTMA custodial account for your child: The kiddie tax directly hits the purpose of these accounts. Here's the math: if you transferred stock to a UGMA and your 14-year-old earns $8,000 in dividends this year, only the first $2,700 gets the child's favorable treatment ($1,350 tax-free under the standard deduction, $1,350 at 10% or 0% depending on the type). The remaining $5,300 is taxed at YOUR marginal rate. If you're in the 37% bracket, that's $1,961 in tax on unearned income that you might have assumed would be taxed at the child's rate. The kiddie tax makes UGMA/UTMA accounts far less efficient for tax planning than they appear. A 529 plan keeps earnings growing entirely tax-free if used for qualified education expenses — entirely avoiding kiddie tax. If you have funds in a UGMA and the child is approaching age 24, consider holding appreciated securities in the custodial account until the kiddie tax no longer applies.

If you're filing a tax return for a college student: The kiddie tax applies to full-time students ages 19–23 if their earned income doesn't exceed half their own support. A 21-year-old college student whose parents pay $32,000 for tuition and room and board, and who earns $8,000 from a part-time job, is still subject to the kiddie tax — because $8,000 earned income is less than half of total support ($40,000 ÷ 2 = $20,000). If that student has $12,000 in investment income from a UGMA, the amount above $2,700 ($9,300) is taxed at the parent's rate. That same student earning $24,000+ from work would cross the "half of support" threshold and escape the kiddie tax entirely — a fact worth knowing if the student can take on additional paid hours. File Form 8615 with the student's Form 1040; you'll need the parent's SSN and a copy of their return to compute the allocable parental tax.

If your teenager has cryptocurrency gains: This is an underappreciated kiddie tax trap. A 17-year-old who received crypto as a gift and sells at a substantial gain generates capital gains — unearned income subject to the kiddie tax. Short-term crypto gains (held less than 1 year) are taxed as ordinary income; long-term gains as qualified capital gains. Both are still subject to kiddie tax at the parent's rate on the amount above $2,700. A 17-year-old selling $20,000 in long-term crypto gains in a household where the parent's marginal capital gains rate is 20% + 3.8% NIIT faces $23.8% tax on $17,300 of the gain — not the child's potentially 0% rate. Document the basis carefully (cost basis of gifted crypto is carryover basis from the giver).

If divorced parents are filing for a child subject to kiddie tax: The rules tie the child's kiddie tax rate to the custodial parent's tax return — not the highest-earning parent. If the custodial parent is in a lower bracket than the noncustodial parent, this may actually reduce the kiddie tax impact. Children must include the applicable parent's SSN on Form 8615. If the custodial parent refuses to share their tax information (a real complication in contentious divorces), the IRS allows the child to use an alternative calculation method outlined in the Form 8615 instructions — the child computes tax as if the parent were in the highest bracket, then files a separate Form 8615 with an explanation.

State Variations

Most states with income taxes follow federal treatment for children's investment income, but don't specifically adopt the § 1(g) kiddie tax mechanism. Instead, many states apply their own income tax at the child's rate (which is the parent's rate under state conformity). California has its own kiddie tax rules that largely parallel the federal rules. Pennsylvania taxes investment income of children differently from federal law in some respects.

Pending Legislation

No changes to the kiddie tax are currently pending. The age extension to age 23 for full-time students was added in 2008 (the Tax Increase Prevention and Reconciliation Act) to close the earlier loophole where children would time their college years to avoid the kiddie tax. The current structure is stable. The dollar thresholds ($1,350 for 2026) are indexed for inflation annually.

Recent Developments

The Tax Cuts and Jobs Act (2017) temporarily changed the kiddie tax to use trust/estate tax rates instead of the parent's rates for 2018–2019, which actually increased taxes on children in lower-income families while benefiting some high-income families. The SECURE Act (2019) retroactively reversed this change back to the pre-TCJA parent-rate method. The 2026 thresholds ($1,350/$2,700) reflect inflation adjustments from the base amounts established after TCJA.

OBBBA and kiddie tax thresholds (2026): The One Big Beautiful Bill Act's permanent TCJA extension keeps the kiddie tax structure stable through 2026 and beyond — no sunset changes affect the kiddie tax rates, thresholds, or parent-rate calculation. The 2026 net unearned income threshold ($2,700 above which kiddie tax applies) reflects inflation indexing under existing law. Revenue Procedure 2025-32 confirmed these amounts.
UGMA/UTMA accounts and 529s — kiddie tax planning: Families moving funds from UGMA/UTMA custodial accounts (where investment income is subject to kiddie tax) to 529 college savings accounts (where growth is tax-free if used for qualified education expenses) can avoid kiddie tax on future investment growth. The kiddie tax makes UGMA/UTMA accounts less attractive for younger children; 529s or Roth IRAs (if the child has earned income) provide tax-advantaged alternatives. However, transferring appreciated securities from a UGMA/UTMA to a 529 requires selling (triggering capital gains) — so timing and basis matter.
Kiddie tax and cryptocurrency gains: Children who hold cryptocurrency (given as gifts, inherited, or purchased with earned income from jobs) can have substantial unearned income from crypto appreciation. Capital gains from crypto held less than a year (short-term, taxed as ordinary income) are subject to kiddie tax under 19 — the gains are taxed at the parent's marginal rate rather than the child's (potentially 0% or 10%). A child selling crypto at a significant gain while the parent is in the 37% bracket faces that rate on gains above $2,700. This is an underappreciated kiddie tax trap for families with crypto-savvy teenagers.
Age thresholds and college student kiddie tax: The kiddie tax applies to full-time students under age 24 who don't have earned income exceeding half their support. A college student whose investment portfolio generates $15,000 in dividends — but who earns only $5,000 from part-time work and whose parents pay tuition — is subject to kiddie tax on most of that investment income. Students who exceed the "earned income equals half support" threshold escape kiddie tax regardless of age; parents sometimes consider whether shifting scholarship arrangements or employment income can help the student cross this threshold.