The Kiddie Tax can increase a child’s tax bill by thousands of dollars when their investment income exceeds specific thresholds set by the IRS. This federal tax rule applies when a child under age 19, or a full-time student under age 24, has more than $2,700 in unearned income for 2025 and 2026. Congress created the Kiddie Tax through the Tax Reform Act of 1986 to prevent wealthy parents from shifting investment income to their children to take advantage of lower tax brackets.
Over 30% of families with custodial accounts unknowingly trigger the Kiddie Tax each year. The rule forces children to pay taxes at their parents’ marginal rate instead of their own lower rate once unearned income passes $2,700.
What you will learn:
💰 Proven strategies to keep your child’s investment income under the $2,700 threshold and avoid higher tax rates
📊 Tax-advantaged accounts like 529 plans and Roth IRAs that completely bypass Kiddie Tax rules
🎯 Timing techniques for selling investments and realizing gains when your child is no longer subject to the tax
⚠️ Common mistakes that trigger unexpected tax bills and how to avoid them with proper planning
📝 Step-by-step guidance on filing Form 8615 and Form 8814 to minimize your family’s total tax liability
Understanding the Kiddie Tax Thresholds and Age Requirements
The Kiddie Tax applies to unearned income only. Unearned income includes interest, dividends, capital gains, rents, royalties, and the taxable portion of scholarships that exceed qualified education expenses. Wages, salary, tips, and self-employment income are earned income and never subject to the Kiddie Tax.
For 2025 and 2026, the first $1,350 of unearned income is covered by the child’s standard deduction. The next $1,350 is taxed at the child’s own tax rate, usually 10% or even 0% for qualified dividends and long-term capital gains. Any unearned income above $2,700 is taxed at the parents’ marginal tax rate, which could be as high as 37%.
The age requirements create three distinct categories. Children under age 18 at the end of the tax year automatically face the Kiddie Tax if they meet the income threshold. Children who are exactly 18 years old on December 31 are subject to the tax unless their earned income exceeds half of their total support for the year.
Full-time college students between ages 19 and 23 face the most complex rules. They must be enrolled full-time at an educational institution during at least five months of the year. The Kiddie Tax applies to these students only if their earned income does not provide more than half of their own support.
| Child’s Age | Kiddie Tax Applies? |
|---|---|
| Under 18 at year-end | Yes, if unearned income exceeds $2,700 |
| 18 at year-end | Yes, unless earned income exceeds half of support |
| 19-23 and full-time student | Yes, unless earned income exceeds half of support |
| 19-23 and not a student | No |
| 24 or older | No |
Calculating Support to Qualify for the Kiddie Tax Exception
The support test offers a powerful exemption from the Kiddie Tax. When a child provides more than half of their own support through earned income, the Kiddie Tax does not apply regardless of how much unearned income they receive. Understanding what counts as support determines whether your child can escape this tax.
Total support includes lodging, food, clothing, education, medical and dental care, recreation, transportation, and similar expenses. For college students, tuition, fees, room, board, books, and supplies all count as support. The key calculation compares the child’s earned income against total support from all sources.
Scholarships create a special exception. Scholarships received by full-time students do not count as support provided by the child when determining the Kiddie Tax. However, scholarships do reduce the total support amount in the denominator. This makes it easier for a child to meet the more-than-half support test.
A 20-year-old full-time college student receives a $35,000 scholarship for tuition, a $15,000 scholarship for room and board, and earns $18,000 from a summer job. Parents provide $12,000 for additional expenses. The total support calculation is $35,000 (tuition scholarship) + $15,000 (room/board scholarship) + $18,000 (earned income) + $12,000 (parents) = $80,000. However, when applying the support test for Kiddie Tax purposes, scholarships are excluded from the numerator.
The student’s earned income of $18,000 must exceed half of the non-scholarship support. The non-scholarship support is $18,000 (earned income) + $12,000 (parents) = $30,000. Since $18,000 exceeds $15,000 (half of $30,000), this student would not be subject to the Kiddie Tax. This example demonstrates why working during college can exempt students from paying investment income at their parents’ higher rates.
Three Most Common Scenarios That Trigger the Kiddie Tax
Custodial UGMA/UTMA Accounts With Stock Dividends
Parents establish Uniform Gifts to Minors Act or Uniform Transfers to Minors Act accounts to save for their children’s future. These accounts hold investments in the child’s name but remain under parental control until the child reaches age 18 or 21, depending on the state. The account generates dividends and capital gains each year.
| Investment Activity | Tax Consequence |
|---|---|
| First $1,350 of dividends and interest | No tax (standard deduction) |
| Next $1,350 of dividends and interest | Taxed at child’s rate (10% or 0%) |
| Dividends and interest above $2,700 | Taxed at parents’ marginal rate (up to 37%) |
| Long-term capital gains above $2,700 | Taxed at parents’ capital gains rate (0%, 15%, or 20%) |
Trust Distributions to Minor Beneficiaries
Grandparents create trusts that distribute income to grandchildren. When a trust makes distributions to a child subject to the Kiddie Tax, the distributed income carries out the trust’s taxable income to the child. The child then pays tax on this distribution at the parents’ rate if it exceeds $2,700.
| Distribution Type | Kiddie Tax Treatment |
|---|---|
| Trust distributes only principal | No unearned income, no Kiddie Tax |
| Trust distributes dividend income of $5,000 | First $2,700 at child/standard rates, remaining $2,300 at parent’s rate |
| Trust distributes capital gains | Gains above $2,700 taxed at parent’s capital gains rate |
| Trust retains all income | No distribution, no Kiddie Tax (trust pays its own tax) |
Taxable Scholarship Income for College Students
Full-time students receive scholarships that exceed tuition and qualified education expenses. The excess scholarship amount becomes taxable unearned income. A student receives a $50,000 scholarship at a private college with $32,000 in tuition and $18,000 in room and board. The $18,000 for room and board is unearned income subject to the Kiddie Tax.
| Scholarship Component | Tax Treatment |
|---|---|
| Amount for tuition and fees | Tax-free, not counted as income |
| Amount for required course books | Tax-free, not counted as income |
| Amount for room and board | Taxable unearned income |
| Amount for personal expenses | Taxable unearned income |
Seven Proven Strategies to Avoid or Minimize the Kiddie Tax
Invest in Growth Stocks That Pay No Dividends
Growth stocks reinvest profits rather than paying dividends to shareholders. These investments appreciate in value without generating annual taxable income. Parents can gift growth stocks to children and hold them until the child turns 24 or graduates from college. At that point, the child sells the stock and pays capital gains tax at their own lower rate.
A parent transfers $30,000 in Amazon stock to their 16-year-old daughter. The stock pays no dividends. Over the next eight years, the stock grows to $45,000. The daughter sells the stock at age 24 after graduating from college. She realizes a $15,000 long-term capital gain taxed at her own rate. If her income is low enough, she may pay 0% capital gains tax.
Maximize 529 College Savings Plan Contributions
529 plans offer tax-free growth and withdrawals for qualified education expenses. Contributions grow without generating annual taxable income. Withdrawals for tuition, fees, books, supplies, and room and board are completely tax-free. The Kiddie Tax never applies to 529 plan earnings.
Parents contribute $5,000 annually to their son’s 529 plan from birth through age 18. The account grows to $120,000. During college, they withdraw $30,000 per year for four years. None of these withdrawals generate taxable income. The account avoided $15,000+ in Kiddie Tax that would have been owed if the same investments were held in a UGMA account.
Fund a Roth IRA for Children With Earned Income
Children with earned income from wages or self-employment can contribute to a Roth IRA. The contribution limit for 2025 is $7,000 or the child’s total earned income, whichever is less. Parents can gift money to fund the contribution as long as the child has earned the income. Roth IRA earnings grow tax-free and qualified withdrawals are tax-free.
A 15-year-old earns $3,500 babysitting and pet-sitting. Her parents gift her $3,500 to contribute to a Roth IRA. She invests in a stock index fund. Over 50 years, assuming 8% annual returns, this single $3,500 contribution grows to over $163,000. All withdrawals in retirement are completely tax-free. This strategy removes the investment from Kiddie Tax exposure forever.
Buy Tax-Exempt Municipal Bonds
Municipal bonds issued by state and local governments pay interest that is exempt from federal income tax. The interest also avoids the Kiddie Tax because it is not included in taxable income. Many municipal bonds are also exempt from state income tax for residents of the issuing state.
Parents purchase $20,000 in municipal bonds yielding 3.5% for their 17-year-old son. The bonds generate $700 annually in tax-exempt interest. This income does not count toward the $2,700 Kiddie Tax threshold. The family can hold the bonds until the child turns 24, avoiding both regular income tax and Kiddie Tax.
Time the Sale of Appreciated Assets Strategically
Parents can gift appreciated stock or mutual funds to children and wait to sell until the child is no longer subject to the Kiddie Tax. After age 24 or when a college student graduates, the child can sell the investments at their own lower capital gains rate. Strategic timing can save thousands in taxes.
| Timing Decision | Tax Outcome |
|---|---|
| Sell stock while child is 19 and in college | $10,000 gain taxed at parent’s 15% rate = $1,500 tax |
| Wait and sell after graduation at age 23 | $10,000 gain taxed at child’s 0% rate = $0 tax |
| Wait until child is 24 with low income | $10,000 gain taxed at child’s 0% rate = $0 tax |
Keep Annual Unearned Income Below $2,700
Monitor investment income throughout the year and take action before December 31. Strategies include deferring bond interest, delaying mutual fund capital gains distributions, or selling losing investments to offset gains. Staying under the $2,700 threshold completely avoids the Kiddie Tax.
A 16-year-old has $2,400 in dividend income by November. Her UGMA account holds stocks with $5,000 in unrealized gains and other stocks with $3,000 in unrealized losses. The parents direct the custodian to sell the losing stocks before year-end. The $3,000 loss offsets future gains. The child’s income stays under $2,700 and avoids the Kiddie Tax.
Encourage Children to Earn Income From Working
Earned income is never subject to the Kiddie Tax. Additionally, earned income provides the basis for Roth IRA contributions and can help children meet the more-than-half support test. Summer jobs, part-time work, and self-employment income all build valuable work experience while reducing tax liability.
A 17-year-old works part-time earning $6,000. He also has $3,500 in dividend income from an UGMA account. Only the unearned income of $3,500 is potentially subject to the Kiddie Tax. The first $2,700 is taxed at favorable rates, and only $800 is taxed at the parents’ rate. His $6,000 in earned income is taxed at his own 10% rate after the standard deduction.
Understanding Form 8615: Tax for Certain Children Who Have Unearned Income
Form 8615 calculates the Kiddie Tax when a child files their own tax return. The form must be attached to the child’s Form 1040. Parents must provide their taxpayer identification numbers and certain tax information from their own return. The form applies the parents’ tax rate to the child’s net unearned income above $2,700.
The form requires three pieces of key information. Part I calculates the child’s net unearned income by subtracting $2,700 from total unearned income. Part II computes a tentative tax by adding the child’s net unearned income to the parents’ taxable income and calculating tax on the combined amount. Part III determines the child’s actual tax by allocating the additional tax between parent and child.
Line 1 requires the child’s total unearned income from all sources. This includes interest, dividends, capital gains, and other investment income. Line 2 asks for the amount that is not subject to the Kiddie Tax, which is $2,700 for 2025 and 2026. Line 3 calculates net unearned income by subtracting Line 2 from Line 1.
Line 6 requires the parent’s taxable income from their Form 1040. If parents file jointly, use the joint return taxable income even if only one parent is the child’s parent. Unmarried parents should use the taxable income of the parent with whom the child lived longer during the year. If the time was equal, use the parent with the higher taxable income.
Lines 9 through 13 perform complex calculations to determine how much additional tax results from taxing the child’s net unearned income at the parents’ rate. This additional tax is added to the tax on the child’s remaining income to arrive at the total tax liability. The calculations ensure that the child benefits from the first $2,700 of unearned income being taxed at favorable rates.
Alternative Filing Option: Form 8814 and Its Limitations
Form 8814 allows parents to report a child’s unearned income directly on their own tax return instead of filing a separate return for the child. This option simplifies filing but comes with strict requirements and potential drawbacks. The election can only be made if the child’s income meets specific criteria.
The child must be under age 19, or under age 24 if a full-time student. The child’s gross income must be less than $13,500 for 2025. The income can consist only of interest, ordinary dividends, and capital gain distributions. No estimated tax payments or withholding can have been made in the child’s name. No income can be from wages, business income, or capital gains from selling assets.
Using Form 8814 triggers an additional tax of up to $135 that parents must pay. The first $1,350 of the child’s unearned income is not taxed. The next $1,350 is taxed at the parents’ rate of 10% if applicable, creating up to $135 of additional tax. Any amount above $2,700 is taxed at the parents’ marginal rate.
| Filing Method | Advantages | Disadvantages |
|—|—|
| Form 8814 (parent’s return) | Simpler filing, no separate return | Up to $135 additional tax penalty, increases parent’s AGI, may reduce credits |
| Form 8615 (child’s return) | Lower overall tax, preserves parent’s credits | More complex, requires separate return and parent’s information |
The increased adjusted gross income on the parents’ return can reduce or eliminate valuable tax credits. The Child Tax Credit phases out at $200,000 for single filers and $400,000 for joint filers. Education credits like the American Opportunity Tax Credit and Lifetime Learning Credit also phase out based on AGI. IRA contribution deductions may be reduced or eliminated.
Common Mistakes That Increase Your Child’s Tax Bill
Gifting Appreciated Stock to Children and Selling Immediately
Parents transfer stock with large unrealized gains to a child and sell it within the same year. They expect the child to pay 0% capital gains tax based on the child’s low income. This strategy backfires because the Kiddie Tax applies to capital gains above $2,700. The gains are taxed at the parents’ rate of 15% or 20% instead of the child’s 0% rate.
A family has $50,000 in Apple stock with a $40,000 gain. They gift the stock to their 16-year-old son and sell it the same year. The $40,000 gain is unearned income. After the $2,700 threshold, $37,300 is taxed at the parents’ 15% capital gains rate, creating a $5,595 tax bill. Waiting until the child turns 24 would have eliminated this entire tax.
Ignoring the Impact on College Financial Aid
Investment income reported on a child’s tax return affects financial aid calculations under the FAFSA. Student income and assets are weighted much more heavily than parent income and assets. A teenager selling investments and showing income two years before starting college can dramatically reduce financial aid eligibility. The FAFSA uses income from two years prior, known as the base year.
A 16-year-old sells $30,000 in stock with a $20,000 gain to help pay for college. This creates $20,000 of income on their tax return. When they apply for college financial aid at age 18, the FAFSA looks back at income from age 16. Student income above $7,600 is assessed at 50%, meaning the $12,400 excess reduces aid eligibility by $6,200. This mistake costs the family thousands in lost grants and work-study opportunities.
Failing to File Required Tax Returns for Children
Parents assume their young children do not need to file tax returns. However, children with more than $1,350 of unearned income for 2025 are required to file even if they are claimed as dependents. Failing to file results in penalties, interest on unpaid taxes, and potential IRS audits. The penalty for failure to file is 5% of unpaid taxes per month, up to 25%.
A 12-year-old receives $2,000 in dividend income from stocks gifted by grandparents. Parents do not file a return because they assume young children are exempt. The IRS sends a notice three years later assessing tax, penalties, and interest totaling over $800. The family pays unnecessarily high penalties that would have been avoided by filing on time.
Not Considering State Tax Rules
Federal Kiddie Tax rules do not always align with state income tax laws. Some states have their own versions of the Kiddie Tax with different thresholds and rates. Other states tax all investment income at the child’s rate regardless of federal rules. Families must research their state’s specific requirements to avoid unexpected state tax bills.
Overlooking the Net Investment Income Tax
Children subject to the Kiddie Tax may also owe the 3.8% Net Investment Income Tax. This additional tax applies when a child’s modified adjusted gross income exceeds $13,450 for 2026. The NIIT is calculated on the lesser of net investment income or the amount by which MAGI exceeds the threshold. This tax can increase a child’s total tax burden to over 40% when combined with the Kiddie Tax.
A 19-year-old college student has $20,000 in dividend income and no other income. The first $2,700 is taxed at favorable rates. The remaining $17,300 is taxed at the parents’ 32% marginal rate, creating $5,536 in income tax. The student’s MAGI of $20,000 exceeds $13,450 by $6,550. The NIIT applies to the lesser of net investment income ($20,000) or excess MAGI ($6,550). The 3.8% NIIT on $6,550 adds $249 to the tax bill.
Do’s and Don’ts for Managing Children’s Investment Income
Do Review Investment Holdings Annually
Examine all custodial accounts, UGMA/UTMA accounts, and trust holdings each November. Calculate projected dividend and interest income for the year. Identify opportunities to harvest losses, defer gains, or reposition assets into tax-advantaged accounts. Why: Proactive planning prevents surprises and allows families to make adjustments before year-end when strategies are most effective.
Don’t Transfer High-Dividend Stocks to Young Children
Avoid gifting stocks or mutual funds that generate substantial annual dividends to children under age 24. These dividends create unearned income that triggers the Kiddie Tax. Why: High-dividend investments work against tax minimization goals by generating taxable income every year that the child cannot control or avoid.
Do Prioritize 529 Plans Over Taxable Accounts
Maximize 529 plan contributions before opening taxable custodial accounts for children. Use 529 plans for education savings and Roth IRAs for long-term wealth building. Why: These accounts offer superior tax benefits and completely avoid the Kiddie Tax while providing flexibility for education and retirement.
Don’t Assume Form 8814 Saves Money
Calculate total family taxes using both methods before electing to report a child’s income on the parents’ return. The convenience of Form 8814 often costs more than filing a separate return for the child. Why: The up to $135 additional tax plus potential loss of credits and deductions frequently makes this election more expensive despite the simpler filing process.
Do Teach Children About Earned Income Benefits
Encourage teenagers to work and understand how earned income builds wealth through Roth IRA contributions while avoiding the Kiddie Tax. Help them track income for tax purposes. Why: Earned income provides immediate tax benefits and teaches valuable financial lessons while building retirement savings with decades of tax-free growth potential.
Pros and Cons of Common Kiddie Tax Avoidance Strategies
| Strategy | Pros | Cons |
|---|---|---|
| 529 College Savings Plans | Tax-free growth and withdrawals, no Kiddie Tax, high contribution limits, can change beneficiaries | Limited to education expenses, penalties for non-qualified withdrawals, less flexibility than other accounts |
| Growth Stocks With No Dividends | No annual taxable income, can defer gains until child is older, potential for significant appreciation | Market risk, requires holding for years, gains eventually taxable when sold, less current income |
| Municipal Bonds | Interest is federally tax-exempt, avoids Kiddie Tax, safe and stable investment | Lower yields than taxable bonds, some state-level taxes may apply, less growth potential |
| Roth IRA for Kids | Tax-free growth forever, flexible withdrawals, teaches savings habits, compounds for decades | Requires child to have earned income, $7,000 annual limit, contributions not deductible |
| Timing Asset Sales After Age 24 | Can capture 0% capital gains rate, avoids Kiddie Tax, gives child control | Requires patience to wait years, market values may change, misses current opportunities |
Special Situations and Advanced Planning Considerations
Alaska Permanent Fund Dividend and Kiddie Tax
Alaskan residents receive an annual Permanent Fund Dividend that counts as unearned income. The 2024 dividend of $1,702 must be reported on federal tax returns for both adults and children. When combined with other investment income, these dividends can push children over the $2,700 threshold. Parents should plan carefully if children have dividend income from other sources.
Married Children Filing Joint Returns
The Kiddie Tax does not apply to children who are married and file joint tax returns with their spouses. This exception prevents the need to use the parents’ tax rate for married couples who are financially independent. The exemption applies regardless of the child’s age, income level, or student status. Marriage creates a separate tax unit.
Business Income for Children Working in Family Businesses
Parents who employ their children in legitimate family businesses can shift income through wages rather than investment transfers. The wages are earned income, not subject to the Kiddie Tax. The business gets a tax deduction for reasonable compensation. The child may owe little or no tax after the standard deduction. This strategy works best when documentation is thorough, duties are real, and compensation is comparable to what would be paid to an unrelated employee.
EE Savings Bonds for Long-Term Deferral
Series EE savings bonds allow taxpayers to defer interest income until maturity or redemption, whichever comes first. Parents can purchase these bonds for children and defer all interest until the child graduates from college and is no longer subject to the Kiddie Tax. At that point, the child can redeem the bonds and pay tax at their own lower rate. Alternatively, if bonds are used for qualified higher education expenses, the interest may be completely tax-exempt under Section 135.
Converting UGMA/UTMA Assets to 529 Plans
Families can liquidate custodial UGMA/UTMA accounts and reinvest proceeds into custodial 529 plans for the same child. The liquidation triggers capital gains tax in the year of sale. However, future growth in the 529 plan avoids all Kiddie Tax. The 529 plan is still a custodial account but receives more favorable treatment for financial aid purposes under FAFSA. This conversion makes sense when children are young and future tax savings outweigh current taxes on liquidation.
State-Specific Variations in Kiddie Tax Treatment
Most states follow federal tax law and apply similar Kiddie Tax rules. However, several states have unique provisions that affect how children’s investment income is taxed. These variations can create planning opportunities or unexpected liabilities depending on your state of residence.
States without income tax, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, do not impose a Kiddie Tax at the state level. Families in these states only worry about federal tax implications. New Hampshire taxes only interest and dividends, not capital gains, creating a different calculation for children with varied investment income.
Some states with income tax use their own thresholds and rates for taxing children’s investment income. California and New York generally follow federal rules but tax the income at state rates once the federal Kiddie Tax applies. Massachusetts taxes all unearned income above $1,000 for dependents at a flat 5% rate regardless of federal treatment. New Jersey provides a $1,000 exemption before taxing investment income at regular rates.
Parents should consult with tax advisors familiar with their state’s specific rules. State tax returns may require different forms or calculations than the federal Form 8615. Some states allow parents to report children’s income on their returns while others require separate filings regardless of the federal election made on Form 8814.
How Form 8615 Calculations Work With Multiple Children
Families with more than one child subject to the Kiddie Tax face additional complexity. Each child must file their own Form 8615, but the calculations interact because all children share the parents’ tax rate. The form requires information about siblings’ net unearned income to properly allocate the parents’ tax rate among all affected children.
Line 7 on Form 8615 asks for the net unearned income of all other children in the family who must file Form 8615. This amount is added to the child’s own net unearned income to create a combined figure. The combined net unearned income is added to the parents’ taxable income to calculate a tentative tax. The additional tax created by including all children’s income is then allocated among the children based on their proportionate share of the total net unearned income.
A family has three children ages 14, 16, and 19. The 14-year-old has $5,000 in dividend income, the 16-year-old has $8,000, and the 19-year-old full-time college student has $6,000. Their parents file jointly with $150,000 in taxable income and are in the 22% tax bracket. Each child calculates net unearned income by subtracting $2,700 from their gross unearned income. The net unearned amounts are $2,300, $5,300, and $3,300, totaling $10,900.
The tentative tax calculation on Line 9 adds the combined $10,900 to the parents’ $150,000 taxable income, creating $160,900. The tax on $160,900 is calculated using married filing jointly rates. The tax on the parents’ $150,000 alone is subtracted from this amount to determine the additional tax caused by the children’s income. This additional tax is allocated among the three children based on their proportionate share of the total $10,900. Each child pays their allocated portion plus the tax on their remaining income at their own rates.
Real-World Examples With Detailed Tax Calculations
Example 1: UGMA Account With Dividend Stocks
Emily is 16 years old and claimed as a dependent by her parents. Her only income is $4,500 in qualified dividends from stocks in her UGMA account. Her parents file jointly with taxable income of $180,000, placing them in the 22% marginal tax bracket and the 15% capital gains bracket. Emily has no earned income.
Emily’s unearned income of $4,500 exceeds the $2,700 threshold, so she must file Form 8615. The first $1,350 of unearned income is covered by her standard deduction and not taxed. The next $1,350 is taxed at Emily’s own rate. Since these are qualified dividends, they are taxed at 0% because Emily’s total taxable income is below the threshold for the 0% qualified dividend rate. The remaining $1,800 ($4,500 – $2,700) is her net unearned income subject to the Kiddie Tax.
The $1,800 of net unearned income is taxed at the parents’ 15% qualified dividend rate. The tax on this portion is $270. Emily’s total tax liability is $0 (on the first $2,700) plus $270 (on the net unearned income) = $270. If Emily’s income had been ordinary dividends rather than qualified dividends, the net unearned income would be taxed at the parents’ 22% ordinary income rate, creating a tax of $396 instead.
Example 2: College Student With Scholarship Income
Jason is 20 years old, a full-time college student, and claimed as a dependent by his parents. He receives a $52,000 scholarship where $35,000 pays tuition and fees, and $17,000 covers room and board. He also earns $8,000 working as a teaching assistant. His parents file jointly with $220,000 in taxable income, placing them in the 24% marginal tax bracket.
The $35,000 for tuition and fees is a qualified scholarship and not taxable. The $17,000 for room and board is taxable unearned income. Jason’s total income is $17,000 (unearned) plus $8,000 (earned) = $25,000. His standard deduction for 2025 is the greater of $1,350 or $400 plus his earned income of $8,000, which equals $8,400. His taxable income is $25,000 – $8,400 = $16,600.
Jason’s net unearned income is $17,000 – $2,700 = $14,300. This amount is taxed at his parents’ 24% rate, creating tax of $3,432 on the net unearned income. His earned taxable income is calculated as total taxable income ($16,600) minus net unearned income ($14,300) = $2,300. This $2,300 is taxed at Jason’s own 10% rate, creating tax of $230. Jason’s total tax is $3,432 + $230 = $3,662.
Jason’s parents provided $15,000 toward his total support of approximately $60,000 (scholarship plus parental support plus his earnings). His earned income of $8,000 does not exceed half of his support, so the Kiddie Tax applies. If Jason had earned $35,000 instead of $8,000, his earned income would exceed half his support, and the Kiddie Tax would not apply. His unearned income would be taxed at his own much lower rate.
Example 3: Trust Distribution to Minor Child
Sophia is 15 years old and the beneficiary of a trust established by her deceased grandfather. The trust distributes $12,000 to Sophia during the year, consisting of $8,000 in dividend income and $4,000 in capital gains. Sophia has no other income. Her mother is single and files as head of household with $160,000 in taxable income, placing her in the 22% marginal tax bracket and 15% capital gains bracket.
Sophia’s unearned income of $12,000 exceeds the $2,700 threshold. The first $1,350 is covered by her standard deduction and not taxed. The next $1,350 is taxed at Sophia’s rate. Assuming these are qualified dividends and long-term capital gains, this $1,350 is taxed at 0% because Sophia’s income is low. Her net unearned income is $12,000 – $2,700 = $9,300.
The $9,300 of net unearned income is divided between ordinary dividends (if any are non-qualified) and qualified dividends/capital gains. Assuming all income receives preferential treatment, the $9,300 is taxed at the mother’s 15% capital gains rate. The tax is $1,395. Sophia’s total tax liability is $1,395.
If the trust had retained the $12,000 instead of distributing it, the trust would pay tax at compressed trust tax rates. In 2026, trusts pay 37% on income over $15,200. The trust would likely pay more tax than Sophia does under the Kiddie Tax, making the distribution beneficial despite the Kiddie Tax. This demonstrates that distributions to children can still be tax-efficient even when the Kiddie Tax applies.
FAQs
Does the Kiddie Tax apply to 529 plan withdrawals?
No. Qualified withdrawals from 529 college savings plans used for tuition, fees, books, and room and board are completely tax-free and never subject to Kiddie Tax.
Can I avoid the Kiddie Tax if my child earns wages?
Partially. Earned income from wages is never subject to the Kiddie Tax. However, unearned income above $2,700 still triggers the tax regardless of wage income.
What happens if my child turns 19 during the year?
Age is determined on December 31. If your child is 19 on December 31 and not a full-time student, Kiddie Tax does not apply that year.
Does the Kiddie Tax apply if both parents are deceased?
No. Form 8615 instructions state at least one parent must be alive at year-end for Kiddie Tax to apply. Both parents deceased eliminates the requirement.
Can my married 21-year-old college student avoid the Kiddie Tax?
Yes. Children who are married and file joint returns with their spouses are exempt from Kiddie Tax regardless of age or student status.
Is the Alaska Permanent Fund Dividend subject to Kiddie Tax?
Yes. The dividend is unearned income and counts toward the $2,700 threshold. Combined with other investment income, it can trigger Kiddie Tax.
Should I use Form 8814 to include my child’s income?
Usually no. Form 8814 creates up to $135 additional tax and raises your AGI, potentially reducing credits. Filing separately for your child is typically cheaper.
Does net investment income tax apply to my child?
Yes. Children with modified AGI above $13,450 for 2026 may owe the 3.8% NIIT on investment income in addition to regular Kiddie Tax.
Can my child contribute to a Roth IRA with dividend income?
No. Roth IRA contributions require earned income from wages or self-employment. Dividends, interest, and investment income do not qualify for contributions.
What if my 18-year-old earns $15,000 and has $5,000 in dividends?
Kiddie Tax may not apply. If the $15,000 earned income exceeds half their total support, Kiddie Tax exemption applies. Calculate total support carefully.
Do growth stocks avoid Kiddie Tax permanently?
Only until sold. Growth stocks generate no income while held, avoiding Kiddie Tax. Capital gains when sold are subject to tax if child is under 24.
Can grandparents open a 529 plan to avoid Kiddie Tax?
Yes. Anyone can open and fund a 529 plan for a child. Growth and withdrawals avoid Kiddie Tax entirely when used for education expenses.
What counts as earned income for the support test?
Only wages and self-employment income. Interest, dividends, capital gains, trust distributions, scholarships, and gifts do not count toward the support test exemption.
Does moving to a no-income-tax state help?
Partially. You avoid state Kiddie Tax but federal Kiddie Tax still applies. Savings are limited to state tax rates on amounts over $2,700.
Can I gift assets to avoid Kiddie Tax?
It depends. Gifting appreciated assets triggers gains when child sells. Strategic gifting combined with timing the sale after age 24 can work well.
Is there a Kiddie Tax on inherited IRAs?
Yes. Required distributions from inherited IRAs to children under 24 are unearned income subject to Kiddie Tax if distributions exceed $2,700 annually.
Should I liquidate my child’s UGMA to buy a 529?
Consider carefully. Liquidation triggers immediate capital gains tax, but future growth in 529 is tax-free. Analyze current gain versus future savings.
Do I need Form 8615 if income is exactly $2,700?
No. Form 8615 is required only when unearned income exceeds $2,700. Exactly $2,700 avoids the Kiddie Tax and does not require Form 8615.
Can my child claim a standard deduction?
Yes. Children filing their own returns claim a standard deduction. For 2025, it is $1,350 or earned income plus $400, whichever is greater.
Related reading
- Does Kiddie Tax Apply to 18-Year-Olds? (w/Examples) + FAQs
- How to File a Kiddie Tax Return in TurboTax (w/Examples) + FAQs
- Does Kiddie Tax Apply to Grandparents? (w/Examples) + FAQs
- What Can Trigger the Kiddie Tax? (w/Examples) + FAQ
- Are IRA Distributions Subject to Kiddie Tax? (w/Examples) + FAQs
- Are Capital Gains Subject to Kiddie Tax? (w/Examples) + FAQs
- How to Qualify for Child Tax Credit (w/Examples) + FAQs