The Kiddie Tax, Explained: What Every Custodial-Account Parent Should Know

The kiddie tax is the rule that decides how a child's investment income gets taxed. It exists to close a loophole: without it, a parent in a high tax bracket could park a pile of dividend-paying investments in their kid's name and have the income taxed at the child's much lower rate. The kiddie tax says, in effect, "past a certain point, we'll tax the child's investment income as if it were yours."

It sounds scary, but for most families with modestly-sized custodial accounts the actual bill is small or zero. The key is understanding where the thresholds sit and which accounts even trigger it in the first place.

Who it applies to

The kiddie tax generally applies to a child who is:

• Under 18, or
• 18 and didn't have earned income covering more than half their support, or
• A full-time student aged 19–23 in the same support situation.

And critically, it only touches unearned income — investment income like dividends, interest, and capital gains. Money your kid earns from a job is taxed under the normal rules for any worker and isn't subject to the kiddie tax at all.

The 2026 thresholds

A child's unearned income is split into three tiers. For the 2026 tax year:

• The first $1,350 is tax-free (covered by the child's standard deduction).
• The next $1,350 is taxed at the child's rate (typically 10%).
• Everything above $2,700 is taxed at the parent's marginal rate.

A worked example

Say your 12-year-old's UTMA throws off $3,200 of dividends and capital gains this year. Here's how it breaks down:

Only that last $500 gets hit with the higher parent rate. For a typical account, the bill is a rounding error — but for a large, dividend-heavy balance it adds up, which is the whole point of the rule.

Which accounts trigger it — and which don't

This is the part that actually matters for planning. The kiddie tax only applies to taxable investment income, so the account type changes everything:

In other words, the tax-advantaged accounts sidestep the kiddie tax entirely. It's fundamentally a UTMA-and-taxable-brokerage concern.

How to keep the bill small

None of this is advice on what to buy — but here's how the mechanics tend to play out:

• Account choice does the heavy lifting. Income that lives in a Roth IRA or 529 never enters the kiddie-tax math.
• Holdings that generate less annual income (growth-oriented positions that pay few dividends) keep more of a UTMA's return as unrealized gains rather than yearly taxable income.
• Right-size the UTMA. Smaller balances rarely throw off enough unearned income to cross even the first $1,350 line.

And there's an offensive move hiding in these same thresholds: because the first $1,350 of a child's long-term gains is effectively tax-free, you can deliberately realize gains each year to step up your cost basis at a 0% rate. See Tax-Gain Harvesting in a UTMA for how to turn the kiddie-tax ceiling into a tool.

The filing mechanics

When a child's unearned income crosses the threshold, the tax is calculated on Form 8615, filed with the child's own return. In some cases, parents can instead elect to report a child's interest and dividends on their own return using Form 8814 — simpler, but not always cheaper. Which path wins depends on the numbers, so it's a good thing to run past a tax preparer in any year the account generates real income.

What to do this week

1. Identify which of your kid's accounts are taxable (UTMA, brokerage) versus tax-advantaged (Roth IRA, 529).
2. Estimate the taxable accounts' annual dividends and interest — your year-end 1099 is the easiest source.
3. If that number is anywhere near $1,350, flag it for your tax preparer before filing season.
4. Keep an eye on it as the balance grows; the thresholds don't move much, but the income will.
5. Track every account in one place in MemoryBank so the income picture is never a year-end surprise.