What Is the Kiddie Tax and How Does It Work?

The “kiddie tax” is a federal tax law provision designed to prevent high-income individuals from reducing their tax liability by transferring investment assets to their children, who might otherwise pay tax at a lower rate. This rule ensures that such unearned income is taxed at the parents’ marginal tax rate, rather than the child’s lower rate. It applies to a child’s unearned income, generated from investments rather than employment, closing a potential loophole where families might shift assets to exploit lower tax brackets.

Identifying Affected Income and Individuals

The kiddie tax applies to a child’s unearned income, which is derived from sources other than wages, salaries, or self-employment. Common examples include interest from savings accounts or bonds, dividends from stocks, capital gains from investment sales, and income from trusts or rents. This type of income is distinct from earned income, such as money a child receives from a part-time job, which is not subject to these rules.

For a child to be subject to the kiddie tax, they must meet specific age and support criteria by the end of the tax year. This includes any child under 18 years old. The tax also applies to children who are 18 years old at year-end, unless their earned income is more than half of their own support.

Full-time students aged 19 through 23 at year-end may also be subject to the kiddie tax if their earned income does not exceed half of their support. The “support test” determines whether a child provides more than half of their own support. If a child meets these conditions and has unearned income exceeding certain thresholds, the kiddie tax rules apply.

Determining the Taxable Amount

The calculation of the kiddie tax involves specific unearned income thresholds that are adjusted annually for inflation. For the 2024 tax year, the first $1,300 of a child’s unearned income is exempt from tax. This initial amount often covers the child’s standard deduction for dependents. The next $1,300 of unearned income is then taxed at the child’s own marginal tax rate.

Any unearned income exceeding $2,600 for the 2024 tax year is subject to the kiddie tax and is taxed at the parents’ marginal tax rate. For the 2025 tax year, these thresholds are slightly higher, with the first $1,350 being tax-free, the next $1,350 taxed at the child’s rate, and amounts above $2,700 taxed at the parent’s rate.

To illustrate, consider a child with $5,000 in unearned income for 2024, such as from dividends. The first $1,300 is covered by the standard deduction and is not taxed. The subsequent $1,300 is taxed at the child’s rate, which is 10% for this income level. The remaining $2,400 ($5,000 – $1,300 – $1,300) is then taxed at the parents’ marginal income tax rate.

Filing and Reporting Obligations

Reporting income subject to the kiddie tax can be handled through two primary methods. One option allows parents to elect to include the child’s unearned income on their own tax return by attaching Form 8814 to their Form 1040. This election simplifies the filing process by eliminating the need for the child to file a separate tax return.

Parents can make this election if the child’s only income for the year is from interest and dividends, including capital gain distributions, and if the child’s gross income is less than $13,000 for the 2024 tax year. The child must not be filing a joint return for the tax year, and no estimated tax payments should have been made under the child’s name or social security number. Using Form 8814 may increase the parents’ adjusted gross income, which could impact their eligibility for certain tax credits or deductions.

Alternatively, if conditions for Form 8814 are not met, the child must file their own tax return using Form 8615 to calculate the kiddie tax. This is necessary when the child has other types of unearned income beyond just interest and dividends, or if their total unearned income exceeds the limit for Form 8814 ($2,600 for 2024). Form 8615 is also required if the parent does not have a filing requirement or if the child has made estimated tax payments. Form 8615 calculates the child’s tax liability by applying the parent’s marginal tax rate to the portion of unearned income that exceeds the specified threshold.