Kiddie tax
Also known as: tax on a child's unearned income
The kiddie tax is a federal rule that taxes a dependent child's unearned income above an annual threshold at the parents' marginal tax rate rather than the child's. It exists to stop families from shifting investment income to children in lower brackets.
The kiddie tax applies only to unearned income — interest, dividends, capital gains, and similar investment income. Wages a child earns from a job are never subject to it and are taxed at the child's own rates. Before the rule existed, a parent in a high bracket could transfer income-producing assets to a young child and have the same income taxed at the child's much lower rate; the kiddie tax removes that advantage.
The calculation works in three tiers. A first slice of the child's unearned income is offset by the child's standard deduction and is effectively untaxed. The next slice is taxed at the child's own rate. Everything above that combined threshold is taxed at the parents' marginal rate. The dollar amounts of these tiers are indexed for inflation and change from year to year, so the mechanism matters more than any particular figure.
The rule reaches further than most people expect. It applies to a child under 18, to an 18-year-old whose earned income does not cover more than half of their own support, and to a full-time student aged 19 through 23 in the same situation. Depending on the facts, the tax is reported either on the child's own return with Form 8615 or, where the parents elect to include the child's income on their return, on Form 8814.
Two further conditions are easy to overlook: the child must have at least one living parent at the end of the year, and must not file a joint return. For the IRS Special Enrollment Examination, the kiddie tax sits inside the dependents and filing-rules material on Part 1. Expect questions that test whether a particular child falls within the age and support conditions, whether a given item of income is earned or unearned, and which portion of the income gets taxed at the parents' rate.
Key takeaways
- The kiddie tax taxes a dependent child's unearned income above a threshold at the parents' marginal rate.
- It applies only to investment income — a child's wages are always taxed at the child's own rates.
- Coverage extends to children under 18, 18-year-olds, and full-time students aged 19 to 23 who do not provide over half their own support.
- The income tiers are indexed for inflation, so the structure matters more than any single dollar figure.
- The tax is reported on Form 8615, or on Form 8814 when parents elect to report the child's income on their own return.