Kiddie Tax: Rules, Rates, and Reporting

What is the Kiddie Tax?

The kiddie tax limits the tax advantage of shifting investment income to children with low tax rates. It applies to unearned income (interest, dividends, capital gains, rent, royalties) of qualifying minors and certain dependent students. Earnings from employment are not subject to the kiddie tax.

Who is subject to the kiddie tax?

The tax applies to:
* Children who are under age 18 at the end of the tax year.
* Dependent full-time students who are under age 24 at the end of the tax year.

It does not apply to children who are married and file joint returns.

Which income is taxed?

The kiddie tax covers unearned income such as:
* Interest
* Dividends
* Capital gains
* Rent and royalties

It does not cover earned income (wages or salary).

How the tax is calculated

Unearned income is taxed in tiers:
* A standard deduction for dependents applies first.
* The next portion of unearned income is taxed at the child’s tax rate (often very low or 0%).
* Unearned income above the annual threshold is taxed at the parent’s marginal income tax rate (which can be as high as the parent’s top rate).

Thresholds and deductions are adjusted annually for inflation; check current IRS guidance for the exact amounts.

How to report a child’s unearned income

There are two common reporting methods:
1. Parent’s election (Form 8814) — Parents may report certain interest, ordinary dividends, and capital gain distributions of a child on the parent’s return if the child’s only income is those types and it is below the applicable limit (recently around $11,000).
2. Child’s return (Form 8615) — If Form 8814 cannot be used, the child files Form 8615 (attached to the child’s Form 1040) to calculate tax using the parent’s tax rate.

Which method applies depends on the child’s income mix and amounts.

Historical context

The kiddie tax was created to prevent parents from avoiding taxes by placing income-producing assets in a child’s name. A 2017 law temporarily taxed that income using trust and estate rates, but legislation enacted in 2020 reverted the rule to use the parent’s tax rate for calculating the kiddie tax going forward.

Strategies to reduce or avoid the kiddie tax

• Keep a child’s annual unearned income below the threshold by choosing investments that generate little or no current income (e.g., growth stocks rather than high-dividend stocks).
• Use tax-deferred investments or bonds with deferred interest until the child is no longer subject to the kiddie tax.
• Consider timing of capital gains or gifting strategies—consult a tax or financial advisor before acting.

Key takeaways

• The kiddie tax applies to unearned income of most children under 18 and dependent full-time students under 24.
• Income above the applicable threshold is taxed at the parent’s marginal rate rather than the child’s rate.
• Reporting is done either on the parent’s return with Form 8814 (when eligible) or on the child’s return via Form 8615.
• Thresholds, deductions, and rules can change, so consult current IRS guidance or a tax professional.

Sources

Primary guidance from the Internal Revenue Service and relevant federal legislation provide the basis for these rules; consult IRS publications on “Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)” and the instructions for Forms 8615 and 8814 for details.