What Is the Kiddie Tax?

By Rebecca Lake. January 27, 2025 · 8 minute read

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What Is the Kiddie Tax?

The kiddie tax is a tax rule designed to prevent parents from shifting investment income to their children to take advantage of lower tax rates. Introduced in 1986, it ensures that unearned income from a child’s investments, such as dividends and interest, is taxed at a higher rate once it exceeds a certain threshold.

Understanding how the kiddie tax works is important for parents of children under age 24 who may be earning money from their own savings and investments. What follows is a simple breakdown of the kiddie tax rules, including who is subject to kiddie tax and how to keep your child’s unearned income below the kiddie tax threshold.

Key Points

•   The kiddie tax prevents parents from shifting investment income to children to take advantage of lower tax rates.

•   If a child’s unearned income exceeds the kiddie tax threshold, it’s taxed at the parents’ tax rate rather than the child’s tax rate.

•   The kiddie tax threshold is $2,600 for 2024 and $2,700 for 2025.

•   Unearned income includes dividends, interest, and capital gains.

•   Tax-efficient investment strategies can help minimize the impact of the kiddie tax.

Definition and Purpose of the Kiddie Tax


The kiddie tax applies to unearned income of children under age 24 (with some exceptions). Unearned income refers to any income that is not acquired through work, and includes income received through investing, such as capital gains distributions, dividends, and interest.

Kiddie taxes were introduced in 1986 as part of the Tax Reform Act to prevent parents from transferring wealth to children as a tax loophole.2 Before the kiddie tax, wealthy families could transfer income-producing assets or make large stock gifts to their children, who were in lower tax brackets, thereby reducing their overall tax liability. The kiddie tax rule ensures that high levels of unearned income are taxed at a rate comparable to the parents’ tax rate rather than the child’s lower rate.

Who Is Subject to the Kiddie Tax?


The kiddie tax applies to children aged 18 and younger, as well as full-time students who are aged 19 to 23, whose unearned income is higher than an annually determined threshold. For 2024, the kiddie tax threshold is $2,600; for 2025, the threshold is $2,700.

If a child meets the above criteria, any unearned income that exceeds the annual threshold will be taxed at the parents’ higher marginal tax rate rather than the child’s lower rate.

An exception to this investment tax rule is a child aged 18 or a full-time student aged 19 to 23 with enough earned income (from working) to cover more than half the cost of their support. Those under 24 who file tax returns as married filing jointly or who are not required to file a tax return for the tax year (due to income below the filing threshold) are also exempt.

It’s also important to note that the kiddie tax does not apply to a child’s earned income; their wages, salaries, or tips are taxed at the child’s own tax rate.

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How the Kiddie Tax Is Calculated


The kiddie tax is calculated based on the child’s unearned income. This generally includes interest, dividends, capital gains, taxable scholarships, trust distributions, and income from gifts or inheritances. It also includes any taxable welfare or Veterans Affairs benefits distributed to a child.

Here’s how the kiddie tax rate applies for tax year 2024 (filed in 2025):

•   The first $1,300 in unearned income qualifies for the kiddie tax standard deduction and is tax-free.

•   The next $1,300 in unearned income is subject to the child’s tax rate.

•   Unearned income above $2,600 is taxed at the parents’ marginal tax rate.

The kiddie tax threshold increases for for tax year 2025 (filed in 2026):

•   The first $1,350 in unearned income is tax-free.

•   The next $1,350 in unearned income is subject to the child’s tax rate.

•   Unearned income above $2,700 is taxed at the parents’ marginal tax rate.

Marginal tax rates for parents range from 10% to 37% for the 2024 and 2025 tax years.

Recent Changes to Kiddie Tax Laws


The kiddie tax first emerged as part of the Tax Reform Act of 1986 as a way to ensure that wealthy parents could not significantly reduce tax obligations by shifting large amounts of investment income to their children. The rule stipulated that all unearned income above a certain threshold is taxed at the parent’s marginal income tax rate rather than the child’s tax rate.

In 2017, the Tax Cuts and Jobs Act made an adjustment to the kiddie tax rule effective for tax year 2018: It substituted the tax rates that apply to trusts and estates for the parents’ tax rate. However, this made the kiddie tax significantly more costly to certain families, including Gold Star children that receive survivor benefits.

In response, Congress included a provision in the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which became law in 2019, to revert the kiddie tax to the old rules, where unearned income is taxed at the parents’ marginal tax rate rather than the trust tax rates. This change was retroactive to the 2018 tax year, allowing affected taxpayers to amend prior-year returns (if desired).

Since then, no major revisions have been proposed or enacted regarding the kiddie tax, though that’s always subject to change.

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Strategies to Minimize Kiddie Tax Liability


To reduce potential kiddie tax liability, parents can implement several tax-planning strategies:

•   Track your child’s investment income throughout the year: If their earnings or gains get close to the threshold, you may be able to sell losing stocks to trigger a capital loss. This strategy, known as tax-loss harvesting, could help offset the gains and potentially allow your child to avoid a kiddie tax hit.

•   Invest in tax-efficient accounts: Consider placing your child’s assets in tax-advantaged accounts like 529 college savings plans or Roth IRAs for kids (if they have earned income), where investment gains grow tax-free.

•   Explore municipal bonds: Interest earned from municipal bonds is generally tax-free at the federal level and may also be exempt from state and local taxes.

•   Shift investments to growth stocks: For tax-efficient investing, you might choose growth stocks that focus on appreciation rather than paying dividends. This can defer taxable income until your child sells the investment (likely at a lower tax rate).

•   Encourage earned income: The kiddie tax does not apply to a child who is age 18 to 23 if their earned income exceeds 50% of their support for the year.

Reporting Kiddie Tax on Your Tax Return


To report and pay the kiddie tax on a child’s unearned income, you can have your child file their own tax return using IRS Form 8615. Or, if your child’s gross income is less than $13,000 in 2024 (less than $13,500 in 2025), you may be able to include your child’s unearned income on your own tax return using IRS Form 8814. This simplifies tax filing but may result in a higher overall tax burden if it increases your adjusted gross income.

It can be a good idea to consult an accountant or tax professional to determine the best approach for your situation.

The Takeaway


The kiddie tax serves as an important safeguard against income shifting by taxing a child’s unearned income at their parents’ tax rate when it exceeds a certain threshold. Understanding the limits that may apply to your child’s unearned income and how the kiddie tax is calculated can help you understand their tax liabilities, as well as tax-efficient strategies that may be employed.

Determining the tax rules and obligations your family may be subject to can be complicated, however, so it can be a good idea to consult with a tax or financial advisor.

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FAQ


What types of income are subject to the kiddie tax?


The kiddie tax applies to a child’s unearned income, which includes interest, dividends, capital gains, taxable scholarships, trust distributions, and income from gifts or inheritances. It does not apply to earned income from wages, salaries, or self-employment.

If a child’s unearned income exceeds the annual threshold ($2,600 for tax year 2024; $2,700 for tax year 2025), the excess is taxed at the parents’ marginal tax rate. This prevents parents from transferring income-producing assets to children to reduce their tax liability.

Are there any exemptions to the kiddie tax?


Yes, the kiddie tax only applies to a child’s unearned income, which may include income from savings and investments above a certain threshold. Earned income from a part- or full-time job or self-employment is not subject to the kiddie tax. Other exceptions include a child with earned income totaling more than half the cost of their support or who is not required to file a return for the tax year (due to income below the filing thresholds).

At what age does the kiddie tax no longer apply?


The kiddie tax no longer applies once a child turns 19, or 25 if they are full-time students, by the end of the tax year. After that cut-off age, all income — both earned and unearned — is taxed at regular individual rates. This means that investment income will be taxed based on the child’s own tax bracket rather than their parents’ rate.


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