The kiddie tax: How the IRS taxes your child’s investment income

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Carrying a (modest) tax burden.

© koosen/stock.adobe.com, © briagin/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc

Before the Tax Reform Act of 1986, parents who had some good tax-planning advice were able to put investments in a child’s name so that any investment income would be taxed at the child’s tax rate, which is typically lower than the parents’ marginal tax rate.

That loophole was closed with the introduction of IRS Topic No. 553, “Tax on a child’s investment and other unearned income tax,” known as the kiddie tax. The kiddie tax applies to certain types of unearned income (e.g., interest, dividends, and capital gains). If those earnings are above a set threshold ($2,700 for the 2025 and 2026 tax years), they’re taxed at the parents’ marginal tax rate rather than at the child’s tax rate—even if the investment is in the child’s name.

Earned income like wages, salaries, tips, and pay for work are not subject to the kiddie tax. Instead, they’re subject to the child’s own tax rate. 

But the following unearned income items are subject to the kiddie tax:

The IRS states that when all of the following conditions are met, Form 8615 must be filed with a child’s tax return:

Form 8615 calculates the kiddie tax. For 2025 and 2026, the first $1,350 of a child’s unearned income is tax free; the next $1,350 is subject to the child’s own tax rate. Unearned income over $2,700 ($1,350 plus $1,350) is pulled out of the child’s income and taxed at the parents’ rate, then added to the tax calculated on the rest of the child’s income at their own rate.

Suppose that Xavier, age 15, who is claimed as a dependent on his parents’ tax return, earned the following income in 2025.

Xavier’s unearned income is ($1,800 + $1,000 + $120 – $80) = $2,840 and his earned income—the amount he earned in wages—is $2,000, making his total income $4,840. (Note that tax-exempt interest is just that—not subject to tax.) 

The next step is to determine how much of Xavier’s unearned income is subject to the kiddie tax. For 2025, the first $2,700 of a child’s unearned income is not subject to the parents’ tax rate. Xavier had $2,840 in unearned income. Subtract the $2,600 threshold: ($2,840 – $2,600) = $140. Form 8615 will need to be filed along with his tax form, and it calculates the tax on that $240 using his parents’ marginal tax rate.

The third step is to calculate Xavier’s standard deduction. For the 2025 tax year, the standard deduction amount for anyone who’s claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,350, or (2) the sum of $450 and the individual’s earned income.

Because Xavier is listed as a dependent on his parents’ return, his standard deduction would be the $2,000 in wages plus $450, or $2,450.

The fourth step—calculating the taxable income—would be to subtract his standard deduction, as well as the amount of unearned income already taxed at his parents’ rate, from his total income. Xavier’s taxable income would be ($4,840 – $2,450 – $140) = $2,050.

Finally, the form will use the tax tables to calculate the tax on Xavier’s taxable income and add it to the tax calculated on the $140 at his parents’ rate. 

It’s a confusing, multilayered calculation (as are most elements of the tax code), but the good news is that modern tax preparation software and websites will automatically make the calculations for you—and fill out Form 8615 if needed.

Under certain conditions, you can elect to report your child’s interest and dividends on your own tax return using Form 8814, “Parents’ election to report child’s interest and dividends.” If you make this election, your child doesn’t need to file Form 8615 separately. However, you might pay more tax. For the 2025 tax year, the following conditions must apply:

Putting investments in your child’s name won’t give you a tax break anymore. The kiddie tax rules were designed to prevent that. Accounts set up under the Uniform Gifts to Minors Act (UGMA) let you transfer assets to a custodial account for your child, but any investment income from that account may be taxed at your rate—not theirs—if it exceeds the kiddie tax thresholds. You won’t owe gift tax unless you give more than $19,000 in 2025 (or $38,000 if you and your spouse give jointly).

It’s great for children to have their own savings, but if the money is earmarked for college, consider using a 529 plan instead. A 529 grows tax free and avoids kiddie tax complications altogether.