Kiddie Tax

The kiddie tax is the rule in section 1(g) of the Internal Revenue Code that taxes a portion of a child's unearned income at the parents' marginal rate instead of the child's own. The section is headed "Certain unearned income of children taxed as if parent's income," and it works by computing the child's tax as the greater of the ordinary calculation or a figure built from the child's income excluding net unearned income, plus that child's share of the tax the parents would have paid on it.

The name is worth explaining, because it is informal in an unusual way. The statute never uses it. But the IRS does: Revenue Procedure 2025-32 heads its section 3.02 "Unearned Income of Minor Children Subject to the 'Kiddie Tax'" and its section 3.11 "Alternative Minimum Tax Exemption for a Child Subject to the 'Kiddie Tax.'" So the phrase is a nickname that the agency itself has adopted while signaling, with the quotation marks, that it is not the statutory term. A reader who has only ever heard "kiddie tax" is using the right words; they are just not the ones in the Code.

Who it reaches, which is broader than the name suggests. Section 1(g)(2) sets three conditions, and all three must hold. First, the child either has not reached 18 by the close of the year, or has reached 18 and meets the age requirements of section 152(c)(3), meaning under 19, or a student under 24, where section 152(f)(2) defines a student as someone in full-time attendance for at least five calendar months of the year, while having earned income that "does not exceed one-half of the amount of the individual's support" for the year. Second, at least one parent is alive at the close of the year. Third, the child does not file a joint return. The practical reading is that a young child is always in scope, and a college student is in scope unless their own earnings cover more than half of what it costs to support them. A 22-year-old paying most of their own way is outside it; a 22-year-old full-time student living on family support is inside it.

Only unearned income is touched. Unearned income means interest, dividends, capital gains, rents, royalties, taxable scholarship amounts and similar items. Wages and self-employment earnings are not. A teenager earning $12,000 at a job pays tax on that at their own rates whatever section 1(g) says, which is why the rule does not discourage a child from working.

The three layers, and where the figures come from. Section 1(g)(4)(A) computes net unearned income by taking the part of adjusted gross income that is not attributable to earned income and subtracting two amounts: the amount in effect under section 63(c)(5)(A), which is $1,350 for 2026, and then the greater of that same amount again or the itemized deductions directly connected with producing the unearned income. Two equal subtractions is why the commonly quoted threshold is twice the published figure. The first slice produces no tax because a dependent child's own standard deduction is at least that amount. The second slice is taxed on the child's own rate schedule. Everything above the two together is net unearned income, and that is the part taxed as though it sat on the parents' return.

The parental election is narrower than it looks. Section 1(g)(7) lets a parent elect to include a child's income on the parent's own return, on Form 8814, which avoids filing a separate return for the child. The conditions are strict. The child's gross income must be only from interest and dividends, including capital gain distributions from funds. The child's gross income must be more than the same published amount used in step two of the main calculation, $1,350 for 2026, and less than ten times that amount, a band Revenue Procedure 2025-32 states explicitly each year. No estimated tax payments may have been made in the child's name and no backup withholding taken. A child with a single stock sale, or with any wages, falls outside the election and needs their own return.

What this means for a family's planning. Moving appreciated investments into a child's name to have income taxed in a lower bracket largely does not work above the threshold, which is exactly the outcome section 1(g) was written to produce. Two consequences follow that are easy to miss. A custodial account belongs to the child irrevocably and hands them full control at the age of majority under state law, so the tax cost is not the only cost of the strategy. And a child subject to section 1(g) loses the refundable portion of the American Opportunity Tax Credit, because section 25A(i) switches refundability off for exactly that child, which can matter more than the kiddie tax itself for a student household.

The computation runs on Form 8615, attached to the child's own return.

1. Separate the child's income into earned and unearned. Only unearned income enters the calculation.

2. Subtract the first amount under section 1(g)(4)(A)(ii)(I), which the IRS publishes annually and which is $1,350 for 2026. For a child with no earned income the standard deduction covers this slice, so no tax arises on it.

3. Subtract the second amount, the greater of that same figure again or the itemized deductions directly connected with the unearned income. This slice is taxed at the child's own rate.

4. What remains is net unearned income, and it is taxed at the parents' marginal rate, added to the child's tax rather than to the parents' bill.

A hypothetical example. Assume for the arithmetic that the published amount for the year is $1,300, a round figure chosen to keep the numbers checkable; the actual 2026 amount is $1,350.

Theo is 15, has no job, and his custodial account produced $5,000 of interest and dividends. His parents are in the 24% bracket and Theo's own rate on this income would be 10%.

• First $1,300: absorbed by his standard deduction. Tax: $0.
• Next $1,300: taxed at Theo's 10%. Tax: $130.
• Remaining $5,000 − $2,600 = $2,400: this is his net unearned income, taxed at his parents' 24%. Tax: $576.
• Total: $130 + $576 = $706.

Had none of this applied and all $3,700 of taxable income been charged at Theo's own 10%, the tax would have been $370. The difference of $336 is the kiddie tax doing its job. Note also what the calculation ignores: if Theo had earned $5,000 at a job instead, none of section 1(g) would have been in play.

What the rule accomplishes

• It removes most of the benefit of shifting investment income to a child purely to have it taxed in a lower bracket, which is the behavior it was written to reach.
• It leaves a child's earnings alone entirely, so working is never penalized by it.
• Two slices of unearned income each year escape the parents' rate, so ordinary custodial accounts of modest size are usually unaffected.
• Where the child's income is only interest and dividends within a defined band, the parental election avoids preparing a separate return.

The honest difficulties

• It reaches full-time students up to 23, which surprises families who think of it as a rule about small children.
• The threshold is small, so a custodial account that has grown for a decade can cross it on ordinary fund distributions with no sale by anyone.
• The child's tax depends on the parents' marginal rate, so a child's return cannot be completed until the parents' income is known.
• A capital gain distribution the child never chose is unearned income, so an account held passively can still generate the tax.
• Being subject to section 1(g) switches off the refundable part of the American Opportunity Tax Credit, a consequence that sits outside this rule and is easy to miss.