What Is the Kiddie Tax?
In plain English
The kiddie tax is a federal tax rule that applies the parent's marginal tax rate to a child's unearned income (dividends, interest, capital gains) above a specified threshold. It was designed to prevent high-income parents from shifting investment assets to children to exploit their lower tax brackets.
How Does the Kiddie Tax Work?
For 2026, the first portion of a child's unearned income (approximately $1,300) is tax-free, and the next portion is taxed at the child's rate. Unearned income above approximately $2,600 is taxed at the parent's marginal rate. This applies to children under 19 (or under 24 if full-time students) who do not file a joint return.
What Types of Income Trigger the Kiddie Tax?
The kiddie tax applies to unearned income only: dividends, interest, capital gains, rents, and royalties. It does not apply to earned income from a job or self-employment. A child's wages from a summer job, for instance, are taxed at the child's own rate regardless of amount.
How Can Families Plan Around the Kiddie Tax?
Strategies include keeping custodial account balances modest, investing in growth stocks that defer gains until the child is older, using 529 plans (which grow tax-free for education), or shifting assets into municipal bonds whose interest is tax-exempt. Consult a tax professional for family-specific planning.
Frequently asked questions
Does the kiddie tax apply to 529 plan withdrawals?
No. Qualified 529 plan distributions used for education expenses are tax-free and not subject to the kiddie tax. This is one reason 529 plans are often preferred over custodial accounts for saving for a child's education.
At what age does the kiddie tax stop applying?
The kiddie tax generally stops at age 19, or age 24 for full-time students whose earned income does not exceed half of their support. Once the child exceeds these age thresholds, their unearned income is taxed at their own rate.
Keep exploring
Related terms
Tax Bracket
Tax brackets are the income ranges at which different marginal rates apply under the U.S. progressive tax system. Only income within each bracket is taxed at that bracket's rate.
Capital Gains Tax
Capital gains tax applies to profits from selling assets like stocks, real estate, or collectibles. The rate depends on how long you held the asset and your total income.
Tax-Exempt
Tax-exempt refers to income, organizations, or investments that are not subject to taxation. Common examples include municipal bond interest, Roth IRA withdrawals, and nonprofit organizations.
Section 529 Plan
A 529 plan is a tax-advantaged savings account for education expenses, offering tax-free growth and withdrawals when used for qualified costs like tuition and room and board.
Tax Professional
A tax professional is a qualified expert — CPA, enrolled agent, or tax attorney — who helps individuals and businesses with tax preparation, planning, and compliance.