What Is the Kiddie Tax, and How Is My Child's Investment Income Taxed?
Last reviewed: July 2026
The kiddie tax is a federal rule that taxes a child's unearned investment income above a set threshold at the parents' marginal tax rate instead of the child's lower rate. In 2026, a dependent child's first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child's rate, and anything above $2,700 is taxed at the parents' rate. It exists so families can't shift large investment portfolios to a child to dodge higher taxes.
Key Takeaways
- The kiddie tax applies to a child's unearned income, not wages from a summer job or part-time work.
- In 2026, the first $1,350 of unearned income is tax-free for a dependent child.
- Unearned income above $2,700 in 2026 is taxed at the parents' marginal rate, not the child's.
- The tax generally applies to children under 19, or under 24 if a full-time student with limited earned income.
- UTMA and UGMA accounts are the most common trigger because the assets and income belong to the child.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate college and tax planning since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff has watched well-meaning parents fund a UTMA for a newborn and then get blindsided by a kiddie tax bill seventeen years later, when that account had grown large enough to throw off real income.
What Counts as Unearned Income for the Kiddie Tax?
Unearned income is money your child receives without working for it. That includes interest, dividends, capital gains, rents, royalties, and taxable distributions from a trust. It does not include wages, salary, or self-employment income your child actually earns.
This distinction matters because the kiddie tax only touches the unearned side. A 16-year-old who earns $6,000 lifeguarding pays nothing under the kiddie tax on those wages. But if that same teenager holds a UTMA account throwing off $4,000 in dividends and capital gains, the kiddie tax is in play.
The most common source of child investment income tax exposure is a custodial account. Money in a UTMA or UGMA legally belongs to the child, so the income it generates is the child's income. Jeff Judge often tells clients that the custodial account they opened "to be safe" is frequently the exact thing that creates the tax problem later.
How Is the Kiddie Tax Calculated in 2026?
The 2026 calculation runs through three tiers of unearned income. Each tier is taxed differently.
| Unearned income (2026) | How it's taxed |
|---|---|
| First $1,350 | Tax-free (covered by the standard deduction for dependents) |
| Next $1,350 (up to $2,700) | Taxed at the child's own marginal rate |
| Above $2,700 | Taxed at the parents' marginal rate |
So if your child has $4,000 of unearned income in 2026, the first $1,350 is tax-free, the next $1,350 is taxed at the child's (usually 10%) rate, and the remaining $1,300 is stacked on top of your income and taxed at your rate. According to the IRS, this calculation is reported on Form 8615, which attaches to the child's return.
For dependents, the 2026 standard deduction is the greater of $1,350 or earned income plus $450, which is why the first $1,350 of unearned income escapes tax. That figure is adjusted for inflation each year, so plan around the current-year number rather than a figure you remember from a few years ago.
Who Does the Kiddie Tax Apply To?
The kiddie tax applies based on age and student status, not just whether someone is your dependent. It covers three groups.
It applies to a child under 18 at year-end. It applies to a child who is 18 if their earned income didn't cover more than half their support. And it applies to a full-time student aged 19 to 23 whose earned income didn't cover more than half their support. The IRS lays out these support tests in detail in Publication 929.
That student rule catches a lot of families off guard. A 22-year-old in college, supported mostly by mom and dad, can still be subject to the kiddie tax on a sizable custodial account or inherited brokerage account. The rule was written specifically to stop families from parking assets with young adults to access lower brackets.
How Can You Plan Around the Kiddie Tax?
You plan around the kiddie tax by controlling how much unearned income a child's account generates and by choosing the right account type up front. There are a few levers that actually move the needle.
First, keep custodial account income under the annual thresholds when you can, using growth-oriented holdings that defer gains rather than throwing off heavy dividends each year. Second, consider whether a 529 plan is a better fit than a UTMA, since 529 growth is tax-deferred and qualified withdrawals are tax-free, sidestepping the kiddie tax entirely. Third, time the realization of capital gains in custodial accounts to years when total unearned income stays under the parent-rate threshold.
At Chesapeake Financial Planners, this is where the R.U.D.D.E.R. Method™, our six-step planning process of Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine, earns its keep. The "Uncover and Understand" step is usually where we find a forgotten custodial account that's about to create a tax headache. Jeff has seen families restructure a college funding plan and cut an avoidable tax bill simply by moving future contributions out of a UTMA and into a 529.
529, Coverdell, or UTMA: which college account is right?
How does a 529 plan work and what are the rules for contributions and withdrawals?
What happens to unused money in a 529 college savings account?
Frequently Asked Questions
Does the kiddie tax apply to my child's summer job income?
No, the kiddie tax does not apply to earned income from a job. Wages, salary, and self-employment income your child works for are taxed at the child's own rate, no matter how much they earn. The kiddie tax only targets unearned income such as interest, dividends, and capital gains from investments and custodial accounts.
What is the kiddie tax threshold for 2026?
In 2026, a dependent child's first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child's rate, and unearned income above $2,700 is taxed at the parents' marginal rate. These thresholds are indexed for inflation each year by the IRS, so confirm the current-year figure before you run the numbers.
Does the kiddie tax apply to 529 plan withdrawals?
No, qualified 529 plan withdrawals are not subject to the kiddie tax. Earnings inside a 529 grow tax-deferred, and withdrawals used for qualified education expenses come out federal-income-tax-free. This is a key reason many families choose a 529 over a UTMA when saving for college, since the 529 sidesteps the kiddie tax that custodial account income can trigger.
At what age does the kiddie tax stop applying?
The kiddie tax generally stops applying once a child turns 18 and provides more than half of their own support through earned income, or once a full-time student turns 24. A non-student adult child over 18 who supports themselves is no longer subject to it. Age alone doesn't end the rule; the support test matters too.
How is the kiddie tax reported on a tax return?
The kiddie tax is reported on IRS Form 8615, which attaches to the child's own tax return. In some cases, parents can elect to report a child's interest and dividends on their own return using Form 8814 instead, if the child's income falls under certain limits. A tax advisor can tell you which option produces the lower bill for your family.
Is UTMA income always subject to the kiddie tax?
UTMA income is subject to the kiddie tax once it exceeds the annual thresholds and the child meets the age and support tests. Because UTMA assets legally belong to the child, the interest, dividends, and capital gains they generate are the child's unearned income. Keeping that income under the current-year threshold, or using a 529 instead, can avoid the issue entirely.
If you're weighing how to save for a child's education without creating a surprise tax bill, our free college funding guide walks through 529 plans, custodial accounts, and the trade-offs of each. Download it at chesapeakefp.com.
Want to go deeper? Our College Funding Playbook walks through this step by step.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
