Kiddie Tax
The kiddie tax is a provision of the U.S. Tax Code under IRC Section 1(g) that taxes the net unearned income of a dependent child — such as dividends, interest, and capital gains — at the parent's marginal tax rate rather than the child's typically lower rate. The rule was originally enacted in 1986 to prevent high-income parents from shifting investment income to their children to exploit lower tax brackets.
Before the kiddie tax existed, a straightforward tax-reduction strategy involved placing income-producing assets in a child's name. Because children rarely have substantial earned income, they occupied the lowest federal tax brackets, meaning investment income transferred to them was taxed at a fraction of the rate the parent would have paid. Congress closed this loophole with the Tax Reform Act of 1986 by enacting what commentators quickly dubbed the kiddie tax.
Under current law, the kiddie tax applies to children who are: (1) under age 18, (2) age 18 and whose earned income does not exceed half their support, or (3) full-time students ages 19 through 23 who also do not earn more than half their support. The tax applies to net unearned income, which is unearned income in excess of twice the standard deduction for a dependent (two times $1,350 in 2025, so $2,700). The first $1,350 of unearned income is sheltered by the dependent's own standard deduction. The next $1,350 is taxed at the child's own rate. Anything above $2,700 is taxed at the parent's marginal rate.
Prior to the Tax Cuts and Jobs Act of 2017, the kiddie tax rate was tied to the parent's marginal rate. The TCJA temporarily changed the kiddie tax to use the trust and estate tax rate schedules instead, but the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 retroactively reversed that change and restored the parent's marginal rate as the benchmark beginning with tax year 2018.
The practical impact of the kiddie tax is most visible in families where parents transfer appreciated securities, bonds, or income-producing real estate to minor children in custodial accounts (UGMA or UTMA accounts). Any income or realized capital gains above the $2,700 threshold in 2025 will be taxed at the parent's rate — potentially as high as 37% for ordinary income or 20% for long-term capital gains. Families considering intergenerational asset transfers should factor the kiddie tax into their planning alongside gift tax exclusions, the step-up in basis rules, and education-savings alternatives like Section 529 plans.
The IRS requires that kiddie-tax calculations be reported on Form 8615, which must be attached to the child's individual return. If the child's only income is interest, dividends, and capital gain distributions totaling less than $11,500 in 2025, a special election on Form 8814 allows the parent to include the child's income directly on the parent's return, eliminating the need to file a separate return for the child.