If you’re a parent saving or investing in your child’s name, you may have heard of the Kiddie Tax. It’s an important rule that can affect how much tax your family owes on your child’s unearned income. Let’s break it down in simple terms.What Is the Kiddie Tax?
The Kiddie Tax is a special tax rule that applies to certain investment income earned by children under age 19 (or under age 24 if they’re full-time students). The rule is designed to prevent parents from shifting investments into their child’s name to take advantage of their lower tax brackets.
In other words: If your child earns too much money from investments, some of that income may be taxed at your (the parent’s) tax rate instead of the child’s lower rate.What Counts as Unearned Income?
The Kiddie Tax applies to unearned income such as:
- Dividends
- Interest
- Capital gains
- Rental income
- Certain trust distributions
Kiddie Tax Thresholds (2025 Example)
Each year, the IRS sets limits. For 2025, here’s how it works:
The first $1,300 of your child’s unearned income is tax-free (due to the standard deduction).
The next $1,300 is taxed at the child’s rate.
Anything over $2,600 is subject to the Kiddie Tax and taxed at the parent’s rate.
Example:
Let’s say your 16-year-old child earns $5,000 in dividends from a stock portfolio.
$1,300 → No tax (standard deduction).
$1,300 → Taxed at your child’s tax rate.
$2,400 (the remaining amount) → Taxed at your tax rate, not theirs.
Who Is Affected?
The Kiddie Tax applies if:
Your child is under 18 at year-end, or
Your child is a full-time student under 24 and doesn’t provide more than half of their own support.
Planning Tips to Reduce the Kiddie Tax
529 Plans for College Savings – Growth in 529 plans is tax-free if used for education.
UGMA/UTMA Accounts – Keep contributions modest to avoid pushing past thresholds.
Teach Your Kids to Work – Earned income (like a part-time job) isn’t subject to the Kiddie Tax.
Consider Timing – Plan the sale of investments strategically to minimize taxable gains.
The Kiddie Tax can catch parents by surprise if they aren’t careful. By understanding the rules, you can make smarter choices about saving and investing for your child’s future—without triggering unexpected tax bills.
Disclaimer: This post is for educational purposes only and should not be taken as tax advice. Tax rules can change, and your personal situation may vary. Always consult a qualified tax professional for guidance.
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