Gavin Howe
The kiddie tax is a set of income tax rules that apply to individuals under 18 years old and full-time students under 24 years old. It was introduced in 1986 to prevent parents from transferring assets to their children to take advantage of their lower tax rates. The tax applies to unearned income, such as interest, dividends, capital gains, rent, and royalties, but does not include salary or wages earned by the child. For example, in 2023, the first $2,500 of a child's unearned income is taxed at the child's rate, while income exceeding this threshold is taxed at the parent's potentially higher rate.
| Characteristics | Values |
|---|---|
| Purpose | To prevent parents from transferring assets to their children to take advantage of their lower tax rates. |
| Who it applies to | Dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24). |
| Exceptions | Children who file tax returns as married filing jointly, and children with earned income totaling more than half the cost of their support. |
| Types of income covered | Capital gains distributions, dividends, interest income, rent, and royalties. |
| Types of income not covered | Salary or wages from working, tips, or self-employment income. |
| Kiddie tax threshold for 2025 | The first $1,350 of unearned income is covered by the standard deduction, the next $1,350 is taxed at the child's marginal tax rate, and anything above $2,700 is taxed at the parent's marginal tax rate. |
| Kiddie tax threshold for 2024 | The first $1,300 of unearned income is tax-free, the next $1,300 is taxed at the child's tax rate, and anything above $2,600 is taxed at the parent's marginal tax rate. |
| Kiddie tax threshold for 2023 | The first $2,500 of unearned income is taxed at the child's rate, and anything above is taxed at the parent's rate. |
| Forms | IRS Form 8615, Form 8814, Form 8960, Form 1040, Form 1040-SR, Form 1040-NR. |
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What You'll Learn
Kiddie tax thresholds
The kiddie tax is a set of income tax rules that apply to individuals under 18 years old and full-time students under 24 years old. It was introduced in 1986 to prevent parents from shifting wealth into their children's names to reduce their own tax liability. The kiddie tax threshold is adjusted for inflation each year.
Kiddie tax is calculated by determining the child's tax liability under two scenarios and taking the larger amount. The tax that would be imposed if the kiddie tax rules didn't apply, and the tax that would be imposed if the child's taxable income for the tax year were reduced by their "net unearned income", then adding the child's share of the "allocable parental tax".
Net unearned income is the portion of the child's adjusted gross income that is not attributable to earned income. A child's net unearned income can't be more than their taxable income. Allocable parental tax is determined by the tax that would be imposed on the parent's taxable income without regard to the kiddie tax rules.
For 2025, the first $1,350 of a child's unearned income qualifies for the standard deduction, the next $1,350 is taxed at the child's income tax rate, and unearned income above $2,700 is taxed at the parent's marginal income tax rate. For 2024, these values were $1,300, $1,300, and $2,600, respectively.
If a child's unearned income is more than $2,600, their parents must file IRS Form 8615 with their federal tax return. If a child's only income is interest and dividend income (including capital gain distributions) and totals less than $13,000, parents may be able to include that income on their return rather than file a separate return for their child.
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Who the law applies to
The kiddie tax applies to individuals under a certain age whose unearned income is higher than a threshold that is annually determined and adjusted for inflation. This tax is designed to prevent a loophole that parents used to take advantage of by putting investments in their child's name.
Initially, the tax law applied only to children under 14, who earned income from dividends or interest since they couldn't legally work. However, tax authorities noticed that some guardians exploited the system by gifting stocks to their older children aged 16 to 18. In response, the Tax Cuts and Jobs Act of 2017 temporarily changed the kiddie tax to use the tax rates that apply to estates and trusts rather than the tax rate of the child's parents.
For the 2025 tax year, the kiddie tax applies to individuals under 18 years old or dependent full-time students under 24 years old. Specifically, it applies to those whose unearned income, such as investment income, exceeds the threshold of $2,700. If the child's unearned income is between $1,350 and $2,700, then their marginal tax rate will apply. If the child's unearned income is over $2,700, then it is taxed at the parent or guardian's tax rate.
The kiddie tax does not apply if the child earned any salary or wages from working; that income is taxed at the child's rate. It also does not apply if the child had no living parents as of the end of the tax year, was married and filed a joint tax return for the year, or was not required to file a tax return for the tax year.
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Exceptions
The Kiddie Tax was established as part of the Tax Reform Act of 1986 to prevent parents from taking advantage of a tax loophole by shifting wealth into their children's names and having their children taxed at a lower rate. The Kiddie Tax applies to individuals under 18 years old and full-time students under 24 years old.
There are several exceptions to the Kiddie Tax:
- The Kiddie Tax does not apply if a child earns any salary or wages from working; that income is taxed at the child's rate.
- The Kiddie Tax does not apply to children who had no living parents as of the end of the tax year.
- The Kiddie Tax does not apply to children who were married and filed a joint tax return for the year.
- The Kiddie Tax does not apply to children who are not required to file a tax return for the tax year.
- The Kiddie Tax does not apply to children whose earned income totals more than half the cost of their support.
- The Kiddie Tax does not apply to income from a 529 plan.
- The Kiddie Tax does not apply to income from wages, salary, tips, or self-employment.
- The Kiddie Tax does not apply to children who turn 19—or 25 in the case of dependent, full-time students—by the end of the tax year.
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How to calculate the tax
The kiddie tax was introduced in 1986 to prevent parents from transferring wealth to their children to reduce their tax liability. It applies to individuals under 18 and full-time students under 24.
The kiddie tax applies to unearned income, such as interest, dividends, capital gains, rent, and royalties. It does not apply to earned income, such as salary or wages.
To calculate the kiddie tax, you need to determine the child's taxable income and the parent's taxable income. The child's taxable income is their gross income minus any deductions. The parent's taxable income is their gross income minus any deductions, including the child's unearned income.
The kiddie tax is then calculated by comparing the tax liability under two scenarios:
- Calculate the tax that would be imposed if the kiddie tax rules didn't apply.
- Calculate the tax that would be imposed if the kiddie tax rules did apply, including the child's unearned income in the parent's taxable income.
The larger of the two tax liabilities is the amount owed under the kiddie tax.
For example, let's say a parent has a taxable income of $100,000 and a child has unearned income of $5,000. The parent's marginal tax rate is 25%, and the child's tax rate is 10%.
Without the kiddie tax, the parent would owe $25,000 in taxes ($100,000 x 25%). With the kiddie tax, the parent's taxable income would be $105,000 ($100,000 + $5,000), and they would owe $26,250 in taxes ($105,000 x 25%). The child would also owe $500 in taxes on their unearned income ($5,000 x 10%).
The total tax liability under the kiddie tax is $26,750 ($26,250 + $500), which is $1,750 more than without the kiddie tax.
In this example, the parent would include the child's unearned income in their taxable income and pay the higher tax amount, while the child would not owe any additional taxes on their unearned income.
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Forms and filing
The Kiddie Tax is a special set of income tax rules that apply to individuals under 18 years of age and full-time students under 24 years of age. It was introduced to prevent parents from taking advantage of a tax loophole by shifting wealth into their children's names, who would be taxed at a lower rate.
The Kiddie Tax applies to a child's unearned income, which includes taxable interest, dividends, capital gains, rents, and royalties. It does not include earned income, such as salary or wages from employment.
If a child's unearned income exceeds a certain threshold, the child's parent or guardian may need to file a separate tax return for the child. The threshold for unearned income has varied over the years but is generally around $2,000 to $3,000. For example, in 2023, the threshold was $2,500, while in 2024, it was $2,300.
When filing taxes for a child subject to the Kiddie Tax, the following forms may be relevant:
- Form 8615: This form is used to calculate the tax on a child's unearned income. If the child's unearned income exceeds the threshold, it is taxed at the parent's marginal tax rate, which is usually higher. Form 8615 is attached to the child's Form 1040.
- Form 8814: This form is used when the parent elects to report the child's interest, ordinary dividends, and capital gains on the parent's own tax return. By making this election, the child does not need to file a separate tax return. Form 8814 is attached to the parent's Form 1040, 1040-SR, or 1040-NR.
It is important to note that the specific rules and thresholds for the Kiddie Tax may change over time, and tax advice should be sought for individual circumstances.
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Frequently asked questions
The Kiddie Tax Law is a set of income tax rules that apply to individuals under 18 years and full-time students under 24 years. It was introduced to prevent parents from taking advantage of their children's lower tax rates.
Unearned income includes interest, dividends, capital gains, rent, and royalties. It does not include salary or wages earned by the child.
The Kiddie Tax is calculated based on the child's unearned income. The first portion of unearned income is taxed at the child's rate, while income exceeding this threshold is taxed at the parent's higher tax rate.
Yes, there are exceptions to the Kiddie Tax. It does not apply if the child had no living parents at the end of the tax year, was married and filed a joint tax return, or was not required to file a tax return. Additionally, if the child's earned income exceeds a certain threshold, the Kiddie Tax may not apply.
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