Kiddie Tax Guide 2026: How a Child's Unearned Income Gets Taxed at the Parent's Rate

The "Kiddie Tax" is the informal name for a federal rule under IRC §1(g) designed to stop parents from shifting investment income to their children to take advantage of a child's lower tax bracket. Instead of a child's dividends, interest, and capital gains being taxed at the child's own low rate, income above a set threshold gets taxed at the parent's marginal rate — often far higher. For 2026, per IRS Rev. Proc. 2025-32, a child's net unearned income above $2,700 is taxed using the parent's rate schedule via Form 8615.

This matters for any family with custodial (UTMA/UGMA) accounts, inherited brokerage accounts, trust distributions to minors, or even taxable scholarship income. On $5,000 of net unearned income, the difference between a child's own 10% bracket and a parent's 24% or 32% bracket can be well over $1,000 in additional tax. This guide walks through the 2026 dollar thresholds, who the rule applies to, exactly how the calculation works on Form 8615, and the legitimate ways families reduce their exposure.

What Is the Kiddie Tax and Why Does It Exist?

Before 1986, a common estate-planning move was to transfer income-producing assets — bonds, dividend stocks, rental property — into a child's name. Because children were typically in the lowest tax bracket (or paid no tax at all), the family's total tax bill dropped simply by re-titling the asset, with no real change in who benefited from the income. Congress closed this loophole by enacting what's formally IRC §1(g), which taxes a child's unearned income above a set threshold at the parent's marginal rate instead of the child's.

The rule only targets unearned income — investment-type income the child didn't work for. A teenager's paycheck from an after-school job is untouched by the Kiddie Tax no matter how large it is. The rule exists specifically to remove the tax incentive for shifting investment assets to children, not to penalize kids who work.

Who Does the Kiddie Tax Apply To? The Age and Support Tests

Per IRC §1(g)(2) and the Form 8615 instructions, the Kiddie Tax applies to a child for a tax year if all of the following are true:

• The child had more than the threshold amount of unearned income for the year ($2,700 for 2026)
• The child is required to file a tax return for the year
• The child does not file a joint return for the year
• At least one parent was alive at the end of the year
• The child meets one of the age tests below

The Age Test

The Kiddie Tax applies if the child was, at the end of the tax year:

• Under age 18, regardless of support or earned income, OR
• Age 18, and the child's own earned income did not cover more than half of the child's own support for the year, OR
• Age 19 through 23 and a full-time student for at least five months of the year, and the child's own earned income did not cover more than half of the child's own support for the year

In practice, this means the Kiddie Tax can follow a dependent child well into their college years — a 21-year-old full-time student living off a trust fund and a part-time campus job is very likely still covered, because their earned income rarely covers more than half their own support.

What Counts as Unearned Income vs Earned Income?

The Kiddie Tax only reaches unearned income. Getting this distinction right matters because earned income is completely outside the rule's scope, and earned income also increases the amount a child can shelter with their own standard deduction.

Unearned Income (subject to the Kiddie Tax)

• Taxable interest (savings accounts, bonds, CDs)
• Ordinary and qualified dividends
• Capital gains, including sales of stock, mutual funds, crypto, and capital gain distributions
• Rental and royalty income
• Taxable pension and annuity income received by the child
• Income from a trust distributed to the child
• Taxable scholarships and fellowship grants not reported on a W-2
• Social Security benefits, to the extent taxable, received in the child's own name

Earned Income (NOT subject to the Kiddie Tax)

• Wages, tips, and salary from a job
• Self-employment income from work the child actually performed
• Taxable scholarships that ARE reported as wages on a W-2 for services required to receive the scholarship

Earned income is still taxable to the child at ordinary rates, but it is never stacked into the Kiddie Tax calculation — only net unearned income is.

The 2026 Kiddie Tax Thresholds: $1,350 and $2,700

Every year the IRS adjusts the Kiddie Tax dollar thresholds for inflation. For 2026, the amounts were set by IRS Rev. Proc. 2025-32, issued to reflect the One Big Beautiful Bill Act (OBBBA) changes enacted July 4, 2025. Rev. Proc. 2025-32 §4.02 confirms: "For taxable years beginning in 2026, the amount in §1(g)(4)(A)(ii)(I)... is $1,350." This is the same $1,350 figure used in 2025 — it did not increase year over year.

That $1,350 figure does double duty and creates three tiers of taxation on a child's unearned income in 2026:

• $0 – $1,350: Covered by the dependent's standard deduction (IRC §63(c)(5)) — no federal tax.
• $1,350 – $2,700: Taxed at the child's own tax rate (typically the 10% bracket).
• Above $2,700: This is "net unearned income" and is taxed at the parent's top marginal federal rate under Form 8615.

The $2,700 combined figure is simply twice the $1,350 base amount ($1,350 deduction + $1,350 taxed at the child's rate = $2,700 before the parent's rate kicks in). The same $1,350 base amount is also used in IRC §1(g)(7) to determine parental-election eligibility — a child's gross income must exceed $1,350 but stay under $13,500 (10× the base amount) for a parent to use the Form 8814 election, covered below.

How the Kiddie Tax Is Calculated: Form 8615

A child (or the person filing on the child's behalf) who owes Kiddie Tax reports it on Form 8615, "Tax for Certain Children Who Have Unearned Income," attached to the child's own Form 1040. The form works in three parts:

• Part I — Net Unearned Income: Subtract $2,700 (the 2026 combined threshold) from the child's total unearned income. If unearned income is $2,700 or less, there's no net unearned income and no Kiddie Tax.
• Part II — Tentative Tax at the Parent's Rate: The IRS computes tax on the parent's taxable income with the child's net unearned income added, minus tax without it — taxing that slice at the parent's marginal rate. Multiple children's net unearned income is combined, then allocated back proportionally.
• Part III — The Child's Final Tax: The child owes the larger of (a) the Part II tentative tax plus tax at the child's own rate on the rest of taxable income, or (b) tax on all taxable income at the child's own rate. This rule means the Kiddie Tax only ever adds tax, never removes it.

Why the Parent's-Rate Method — Not Trust Rates — Applies in 2026

From 2018–2019, the TCJA briefly taxed this income using compressed trust/estate brackets that hit 37% at just over $12,500. The SECURE Act (Dec. 2019) repealed that and restored the parent's-marginal-rate method for 2020 onward. Rev. Proc. 2025-32 confirms this method via Form 8615 remains the law for 2026.

Worked Example: A Child With $8,000 in Unearned Income

Consider a 16-year-old dependent with $8,000 in interest and dividend income from a custodial account in 2026, no earned income, and parents in the 24% federal bracket (assume the extra income doesn't push them into a higher bracket).

• Step 1 — Standard deduction: With no earned income, the 2026 dependent standard deduction is $1,350. Taxable income = $8,000 − $1,350 = $6,650.
• Step 2 — Net unearned income (Form 8615, Part I): $8,000 − $2,700 = $5,300.
• Step 3 — Taxed at the child's own rate: $6,650 − $5,300 = $1,350, at the child's 10% bracket = $135.
• Step 4 — Taxed at the parent's rate: $5,300 × 24% = $1,272.
• Step 5 — Total Kiddie Tax: $1,272 + $135 = $1,407.

Compare that to a world with no Kiddie Tax, where all $6,650 would be taxed at the child's own 10% rate: just $665. The Kiddie Tax adds roughly $742 here — the direct cost of the parent's higher bracket applying to the child's investment income.

Can Parents Elect to Report a Child's Income Instead? (Form 8814)

Rather than filing a separate return for the child, a parent can sometimes elect to report the child's investment income directly on the parent's own Form 1040 using Form 8814, "Parents' Election To Report Child's Interest and Dividends." This avoids a separate filing for the child, but it isn't available to everyone and isn't always the cheaper option.

Requirements for the Form 8814 Election

• The child's only income for the year is from interest, dividends (including capital gain distributions) — no wages, self-employment income, or other unearned income types
• The child's gross income for 2026 is more than $1,350 but less than $13,500 (10 times the base threshold amount)
• The child was under age 19, or under age 24 and a full-time student, at year-end
• The child is required to file a return except for this election
• No estimated tax payments were made in the child's name, and no backup withholding applied
• The child does not file a joint return for the year

Why This Election Isn't Always a Good Idea

Reporting the child's income on the parent's return increases the parents' Adjusted Gross Income (AGI), which can reduce or eliminate income-based deductions and credits the parents otherwise qualify for, and can push investment income into Net Investment Income Tax territory. Many CPAs recommend running the numbers both ways — Form 8814 on the parent's return versus a standalone Form 8615 return for the child — before choosing, since the "cheaper" option depends heavily on the parents' specific AGI and deduction phase-outs.

How to Reduce Kiddie Tax Exposure: Planning Strategies

The Kiddie Tax can't be avoided outright once a child has enough investment income, but a few legitimate strategies reduce exposure:

1. Favor Growth Over Income-Producing Assets

Growth stocks and index funds that don't pay significant dividends generate little annual unearned income, deferring tax until shares are eventually sold — by which point the child may be older than 23 or covering over half their own support, taking them outside the rules entirely.

2. Use 529 Plans for Education Savings

529 earnings grow tax-deferred, and qualified withdrawals for education expenses are federally tax-free — so they generally don't create Kiddie-Tax-exposed income at all, unlike a taxable custodial brokerage account.

3. Fund a Roth IRA With the Child's Earned Income

If a child has real earned income, contributing it to a custodial Roth IRA shelters future growth entirely — Roth accounts aren't taxed as they grow, so the Kiddie Tax never touches them.

4. UTMA/UGMA Accounts Get No Special Treatment

Custodial UTMA and UGMA accounts are popular for gifting assets to children, but income they generate is fully subject to the Kiddie Tax like any other account titled in the child's name — the custodial structure provides no shelter on its own.