Kiddie Tax Explained: Rules and Reporting Requirements
Understand the tax implications of a child's investment income. This guide explains when unearned income is taxed at the parent's rate and how to report it.
The kiddie tax is a mechanism designed to discourage high-income parents from shifting their investments to their children to secure a lower tax rate. It applies the parents’ higher tax rate to a child’s significant unearned income. This prevents substantial investment income, such as dividends or capital gains, from being taxed at a much lower rate. The rules ensure this type of income is taxed similarly, regardless of whether it’s held by the parent or the child.
Who is Subject to the Kiddie Tax
Determining if a child is subject to the kiddie tax involves meeting three specific tests related to age, unearned income, and financial support. The first is an age test. The tax generally applies to children under age 18 at the end of the tax year. It also extends to children who are 18, as well as full-time students aged 19 through 23, if their earned income does not cover more than half of their own support for the year.
The second condition is an unearned income test. The kiddie tax rules are triggered if the child’s unearned income for the year exceeds a certain threshold. For the 2025 tax year, this amount is $2,700. This figure is indexed for inflation and can change annually. If a child’s unearned income is below this amount, the kiddie tax does not apply.
Finally, a support test must be considered. The child must not have provided more than half of their own support during the tax year. This test is particularly relevant for older children, such as an 18-year-old or a full-time student up to age 23. If a child in these age brackets earns enough income to provide more than half of their own living expenses, they are not subject to the kiddie tax. At least one living parent at the end of the tax year is also a requirement.
Calculating the Tax on Unearned Income
To correctly calculate the kiddie tax, one must first distinguish between unearned and earned income. Earned income is payment received for services performed, such as wages from a part-time job. Unearned income is derived from property or investments and includes items like taxable interest, dividends, capital gains, rent, and royalties.
The calculation itself follows a tiered structure based on thresholds that adjust for inflation. For the 2025 tax year, the first $1,350 of a child’s unearned income is not taxed at all, as it is sheltered by the child’s standard deduction. The next $1,350 of unearned income is taxed at the child’s own marginal tax rate. Any unearned income exceeding the combined total of $2,700 for 2025 is the amount subject to the parents’ highest marginal tax rate.
Consider a hypothetical example for the 2025 tax year. A 16-year-old child has no earned income but receives $5,000 in dividend income from a trust. The first $1,350 of this income is tax-free. The next $1,350 is taxed at the child’s rate, which might be 10%, resulting in $135 of tax. The remaining $2,300 ($5,000 – $2,700) is taxed at her parents’ top marginal rate. If the parents are in the 32% tax bracket, the tax on this portion would be $736, making the child’s total federal income tax liability $871.
How to Report and Pay the Kiddie Tax
When the kiddie tax applies, the standard method for reporting it is for the child to file their own tax return. This involves preparing a Form 1040 for the child and attaching the completed Form 8615. To complete Form 8615 correctly, the filer will need access to the parent’s tax return. Specific information from the parent’s Form 1040 is required, including their name and Social Security Number, their tax filing status, and their taxable income. This data is used to determine the marginal tax rate to apply to the child’s unearned income.
In certain situations, a parent may elect to report the child’s unearned income directly on their own tax return. This is done using Form 8814, “Parents’ Election To Report Child’s Interest and Dividends.” This option is only available if the child’s income consists solely of interest and dividends, and their gross income is below a specific limit, which for 2025 is $13,500.
To use Form 8814, the child must also be required to file a return if the election is not made, must not file a joint return, and must not have had any federal income tax withheld from their income. While this method can simplify the filing process by avoiding a separate return for the child, it can have drawbacks. Including the child’s income on the parent’s return increases the parent’s adjusted gross income (AGI), which could potentially phase out their eligibility for certain tax deductions and credits.