Understanding the kiddie tax: Unearned income rules for kids and what parents should know

If you are saving or investing for a child under age 18, it may be important to understand the “kiddie tax,” which is an IRS rule that applies to a child’s unearned income above $2,700. When the child’s unearned income for the year is more than $2,700, the portion above that threshold is no longer taxed at the child’s lower rate.

That matters because common savings and investing accounts such as custodial accounts, gifted securities, mutual fund holdings and interest-bearing accounts can all generate taxable, unearned income in a child’s name. Understanding when the kiddie tax rule applies and how the unearned income is reported to the IRS may help you avoid surprises and make intentional choices about how assets are held for your child.

Kiddie tax: The simple definition

In 2026, the kiddie tax is applied to a child’s unearned income over the $2,700 limit. Instead of being taxed at the child’s tax rate, the amount above that threshold is taxed at the parent’s marginal tax rate.

This rule was originally established as part of the Tax Reform Act of 1986 as a way to help prevent parents from shifting wealth onto their children, which would have effectively allowed them to avoid paying taxes at a higher rate.

Who does the kiddie tax apply to?

In practice, the kiddie tax rule most often applies to families with children who have unearned income from investments or savings accounts in the form of capital gains, dividends and interest. The kiddie tax does not apply to children who have earned income. For example, a child with a summer job may have to pay taxes on their earned income, but the kiddie tax does not apply to that money. However, if the child also has a custodial account and that account earns $3,000 in dividends for the year, the kiddie tax would apply.

The kiddie tax comes into play if the child’s unearned income is more than the annual IRS limit, which is set at $2,700 for 2026. The first $1,350 of unearned income is generally not taxed under the dependent standard deduction rules, depending on the child’s overall filing situation. The second $1,350 is taxed at the child’s tax rate. Any unearned income above that is taxed at the parents’ marginal tax rate.

There are other rules that come into play, too. A child may be subject to the kiddie tax when they have unearned income above $2,700 and may need to attach Form 8615 to their tax return if the following situations apply:

That means the kiddie tax is not just a rule for younger children. Even older kids and college students may have to pay the kiddie tax. If you’re not sure if the kiddie tax applies, consider consulting a tax professional.

What counts as unearned income for kiddie tax purposes

Unearned income generally includes interest, ordinary dividends, capital gains distributions and other investment income.

That may include interest, dividends and earnings from custodial accounts, mutual funds or exchange-traded funds (ETFs), and other investments; interest from savings products (like certificates of deposit or savings accounts); and gains from the sale of appreciated securities held in a child’s name.

Meanwhile, the kiddie tax does not apply to earned income, such as wages or self-employment income. It’s crucial to make the distinction when it’s time to file tax returns.

How the kiddie tax is calculated

The kiddie tax is not a single tax rate that applies to all of your child’s unearned income. It applies to the portion of unearned income above the IRS limit of $2,700 in 2026.

This $2,700 threshold is the dividing line. Some of the child’s unearned income may still fall under the child’s ordinary tax treatment, while the portion above the IRS limit may be subject to the kiddie tax. The exact outcome depends on the child’s and parent’s individual situation and tax return details, but it’s worth noting that crossing the threshold changes the tax calculation.

For example, suppose a child has $4,000 of unearned income for the year and otherwise meets the IRS criteria for the kiddie tax. Because the special calculation applies to unearned income over $2,700, only $1,300 may be taxed at the parents’ marginal tax rate.

Common situations that may trigger the kiddie tax

Custodial accounts are one of the most common triggers. Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial accounts are a type of investment account set up for a minor. An adult (the custodian) manages the money or investments on behalf of the minor (the beneficiary) until the child reaches the age of majority (usually age 18 or 21, depending in which state you live). If that type of account generates enough taxable interest, dividends or gains, the kiddie tax may apply.

Gifted stock that has appreciated may also trigger the kiddie tax. For example, if family members gift a child stocks or funds that later pay dividends or are sold at a gain, that income may be taxable to the child. Mutual funds and ETFs in taxable accounts may also trigger the kiddie tax when there are capital gain distributions even if the shares are not sold that year.

Interest-bearing accounts may also trigger the kiddie tax. A child with a large cash balance in a savings vehicle, like a CD or trust, could generate enough interest income to trigger these rules. It’s worth monitoring all of your child’s bank accounts since the kiddie tax is not limited to just investment gains.

How to reduce kiddie tax surprises

As you evaluate your family’s tax picture, it may helpful to think carefully about where savings assets are held. For example, if the goal is saving for a child’s future education, a tax-advantaged option, like a 529 plan, may help avoid taxes on gains.

Another step is managing taxable events. Families may want to pay attention to when gains are realized, how much dividend income an account is producing and whether tax-inefficient holdings are sitting in a child’s taxable account.

Account titling also matters. While a custodial account puts the assets legally in the child’s name, which may be useful for gifting and long-term saving, it may also make the income reportable to the child. With that in mind, families may want to weigh the tax effects alongside control, flexibility and long-term goals.

Working with a tax professional may help you learn how your child’s earnings are taxed so you can avoid surprises.

How to report the kiddie tax on a tax return

When the kiddie tax applies, Form 8615Opens overlay is the main form used to determine a child’s tax on unearned income.

In some cases, parents may be able to report the child’s interest and dividend income on their return using Form 8814Opens overlay. This is possible only if the child’s sole income is from interest and dividends, including capital gains distributions, and totals less than $13,500 (as of 2026).

That election is just an option. The route that makes the most sense depends on the child’s income mix, the filing requirements and the broader family tax picture. You may want to speak with a tax professional to help you develop a strategy that aligns with your family’s situation and goals.

The bottom line

The kiddie tax may be an important rule for families to understand, especially when saving and investing for children. A child’s unearned income is taxed once it crosses the IRS threshold of $2,700 (as of 2026). The kiddie tax applies to unearned income like investment gains and interest on savings, but not earned wages. The kiddie tax may apply when your child has custodial accounts, gifted assets and taxable distributions.

When saving and investing money for your child, it may be wise to be intentional about account type, taxable events and reporting requirements. The right structure depends on your individual situation including what the money is for, how soon it may be used and how the tax consequences could impact long-term financial goals.

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