What Is the Kiddie Tax?
Opening an investment account in a child’s name sounds like a clean way to move income to a lower tax bracket, but the tax code anticipated that idea decades ago.
The short answer
The kiddie tax is a rule that applies a parent’s tax rate, rather than a child’s own generally lower rate, to a certain amount of a child’s unearned income, such as interest, dividends, and capital gains, above a threshold set by the government. It exists to prevent families from shifting investment income into a child’s name purely to take advantage of a lower tax bracket. It generally applies to unearned income specifically, not wages a child earns from actual work, and the exact thresholds involved change over time.
Why it targets unearned income specifically
Earned income — a paycheck from an actual job — is treated differently under this rule and is generally taxed at the child’s own rate rather than being pulled into the kiddie tax calculation. The distinction matters because the rule was built to close a specific loophole: a parent moving investment assets like dividend-paying stocks or interest-bearing accounts into a child’s name to have that income taxed at the child’s presumably lower rate, rather than the parent’s own. A child’s wages from a summer job don’t create that same incentive, so they’re treated more like ordinary earned income.
How the calculation generally works
Under the kiddie tax, a child’s unearned income above a certain threshold is taxed using rates tied to the parent, rather than the child’s own bracket. Amounts below that threshold are typically taxed at the child’s own rate or may not be taxed at all, depending on how small the amount is. Because the specific dollar thresholds are set by the government and adjusted periodically, the shape of the rule — a threshold below which the child’s own rate applies, and an amount above which the parent’s situation matters — is more useful to understand than any particular figure.
Where it commonly comes up
This rule tends to surface for families using custodial accounts, trust income, or other investment vehicles set up in a child’s name, often as part of saving for future expenses like education. It’s a different mechanism than the tax treatment of a 529 plan, which is specifically designed with education tax benefits in mind; a custodial brokerage account doesn’t carry those same built-in advantages and is more exposed to rules like the kiddie tax. Families weighing where to hold savings intended for a child sometimes compare these structures directly because the tax treatment differs so much between them.
Filing implications
Depending on the amount and type of income involved, a child’s unearned income affected by this rule may need to be reported on the child’s own return, in some cases using a specific calculation method, or in certain situations may be reportable on a parent’s return instead. Because the mechanics can get complicated once multiple income sources or filing choices are involved, this is an area where the complexity can justify working with a CPA or enrolled agent rather than navigating it without guidance, particularly for families with more than a simple custodial account involved.
What to weigh
The kiddie tax means that putting investment income in a child’s name doesn’t automatically produce the tax savings it might seem to on the surface, especially once the income crosses the relevant threshold. Anyone considering an investment account for a child’s benefit is better served by understanding this rule’s general shape — earned versus unearned income, a threshold, and a parent-tied rate above it — than by assuming a child’s account is always taxed favorably.