What Is the Kiddie Tax Rule and How Does It Work?
Understand the kiddie tax, a regulation that requires a child's unearned income to be taxed at their parent's rate, not their own, in certain situations.
The kiddie tax is a tax on a child’s unearned income, which is income not derived from work or a trade or business. The rule was established as part of the Tax Reform Act of 1986 to address a tax planning strategy where parents in high tax brackets would transfer income-producing assets to their children. By shifting assets like stocks or bonds to a child, the investment income would be taxed at the child’s lower income tax rate, reducing the family’s total tax bill. The kiddie tax rule closes this loophole by taxing a child’s significant unearned income at the parents’ marginal tax rate.
Who is Subject to the Kiddie Tax Rule
The kiddie tax applies if a child has unearned income over a specific threshold and meets certain age and support conditions for the tax year. For the 2025 tax year, the rule is triggered if a child’s unearned income exceeds $2,700. Unearned income is money not paid for services, with common examples including taxable interest, dividends, capital gains, royalties, and income received as a beneficiary of a trust. This is distinct from earned income, which includes wages, salaries, and other payments for personal services rendered.
The tax applies to children who are under age 18 at the end of the tax year. It also extends to certain older children, including those who were age 18 at the end of the year and whose earned income did not exceed half of their own support costs. The rule further applies to full-time students between the ages of 19 and 23, provided their earned income is less than half of their annual support expenses. To be considered a full-time student, the individual must be enrolled in school for at least five months of the tax year.
This support test helps to differentiate between children who are genuine dependents and those who are financially independent. The child must also be required to file a tax return and cannot file a joint return for the year. At least one of the child’s parents must be alive at the end of the tax year for the kiddie tax to apply.
Calculating the Child’s Tax Liability
The calculation separates the child’s unearned income into three parts, each subject to a different tax treatment. This process requires access to the parent’s tax information, as their highest marginal tax rate is a necessary component of the formula.
The first step is to determine the child’s net unearned income. For the 2025 tax year, the first $1,350 of 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, but at the child’s own income tax rate. Any unearned income that exceeds the $2,700 threshold ($1,350 + $1,350) is the amount subject to the kiddie tax. This remaining portion is taxed at the parent’s highest marginal tax rate.
Consider a 16-year-old child with $5,000 in unearned income from dividends and no earned income. Using 2025 figures, the first $1,350 is tax-free. The next $1,350 is taxed at the child’s rate. The remaining $2,300 ($5,000 – $2,700) is taxed at the parent’s top marginal rate.
How to Report and Pay the Kiddie Tax
The most common way to report the tax is by filing a Form 1040, U.S. Individual Income Tax Return, for the child. Attached to this return would be Form 8615, “Tax for Certain Children Who Have Unearned Income.” This form serves as the official worksheet to perform the tax computation, separating the unearned income into its various taxable portions and applying the correct tax rates. Filing a separate return for the child ensures that their income and tax liability are accounted for independently, even though the parent’s tax rate is used for part of the calculation.
In certain limited situations, a parent may elect to include the child’s income 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 threshold, which for 2025 is $13,500. Additional requirements apply:
- The child must not have made any estimated tax payments for the year.
- No federal income tax can have been withheld from their income.
- The child’s only income was from interest and dividends.
- The child’s gross income was less than $13,500.
Choosing this option can simplify the filing process but may result in a higher overall tax for the parent.