Calculating the Kiddie Tax Standard Deduction

The “kiddie tax” discourages parents in higher income brackets from shifting investment income to their children to take advantage of a lower tax rate. A key part of this tax is the child’s standard deduction, which is not a fixed amount for dependents. The rules for this deduction are different from those for non-dependents and are essential for determining the final tax liability. The calculation involves evaluating the child’s income and applying a formula to find the deduction, which directly impacts the amount of income subject to tax.

Determining Who is Subject to the Kiddie Tax

Before calculating the deduction, you must determine if the kiddie tax applies. The rules target dependents with significant unearned income, such as interest, dividends, and capital gains. For the 2025 tax year, the kiddie tax may apply if the child’s unearned income is more than $2,700.

Three tests must be met for the tax to apply. The first is an age test: the child must be under age 18 at the end of the tax year. The rules also apply to children who are 18 or full-time students aged 19 to 23, if they meet an earned income test. This test requires that the child’s earned income did not provide more than half of their own support for the year.

The final condition is the unearned income threshold. If the child meets the age and support tests and has unearned income over $2,700 for 2025, they are subject to the kiddie tax. Their tax liability must then be calculated using Form 8615, “Tax for Certain Children Who Have Unearned Income.”

Calculating the Standard Deduction for a Dependent

Once a child is subject to the kiddie tax, the next step is calculating their standard deduction. For a dependent, this amount is not the same as the standard deduction for a single individual and depends on the type and amount of income the child has.

For 2025, a dependent’s standard deduction is the greater of two amounts: $1,350, or the child’s total earned income plus $450. This calculated figure cannot exceed the standard deduction for a single filer, which is $15,000 for the 2025 tax year. The cap prevents a dependent with high earned income from receiving a larger deduction than a self-supporting individual.

For example, consider a child with only unearned income, such as $5,000 in dividends. Since the child has no earned income, the calculation of earned income plus $450 results in $450. The greater of $1,350 and $450 is $1,350, so the child’s standard deduction is $1,350.

If a child has $3,000 in earned wages and $4,000 in unearned interest income, their standard deduction is calculated. Their earned income of $3,000 plus $450 equals $3,450. Since $3,450 is greater than $1,350, the child’s standard deduction is $3,450.

A child with $15,000 in earned income would calculate their deduction as $15,000 plus $450, which equals $15,450. However, this amount is greater than the 2025 single filer’s standard deduction of $15,000. Therefore, the child’s standard deduction is capped at $15,000.

Applying the Standard Deduction to Calculate Taxable Income

After finding the standard deduction, you apply it to calculate the child’s taxable income on Form 8615. The standard deduction is subtracted from the child’s total income to find the taxable amount. This amount is then subject to a tiered tax system.

The tax on a child’s unearned income is layered for 2025. The first $1,350 of unearned income is generally not taxed due to the standard deduction. The next $1,350 is taxed at the child’s own marginal tax rate. Any unearned income over $2,700 is taxed at the parents’ highest marginal tax rate.

For example, assume a 16-year-old has $1,000 in wages and $5,000 in dividends. Her standard deduction is the greater of $1,350 or her earned income ($1,000) plus $450, which is $1,450. Her total income is $6,000, and subtracting the $1,450 standard deduction leaves a taxable income of $4,550.

On Form 8615, the net unearned income is calculated as the total unearned income ($5,000) minus $2,700, which results in $2,300. This $2,300 is taxed at the parents’ rate. The remaining taxable income is taxed at the child’s rate, which fulfills the objective of the kiddie tax.