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.

The kiddie tax is one piece of the bigger picture of how UTMA accounts are taxed — which also covers capital gains, dividends, and contributions.

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.

Frequently asked questions

What is the kiddie tax?

The rule that decides how a child's unearned investment income — dividends, interest, and capital gains — is taxed. Money a child earns from a job is taxed under the normal rules and isn't subject to it.

What are the 2026 kiddie-tax thresholds?

For 2026, the first $1,350 of a child's unearned income is tax-free, the next $1,350 is taxed at the child's rate, and everything above $2,700 is taxed at the parent's marginal rate.

Which accounts trigger the kiddie tax?

UTMAs and taxable brokerage accounts in the child's name. It does not apply to a custodial Roth IRA or a 529, where growth is tax-advantaged.

Who does the kiddie tax apply to?

Generally a child under 18, or a full-time student aged 18 to 23 who doesn't earn more than half of their own support.

How is the kiddie tax reported?

It's figured on Form 8615 with the child's return. In some cases, parents can instead elect to report the income on their own return via Form 8814.

Do teenagers have to file taxes?

It depends on how much they made. A teen with earned income (a job or self-employment) generally must file if their earned income exceeds the standard deduction for the year, and self-employment income of $400 or more triggers a filing requirement on its own. A teen may also want to file to get back any withheld taxes even when not required to. Investment income in a custodial account can trigger the kiddie tax separately.

Do minors have to pay taxes?

Yes — being a minor doesn't exempt you from taxes. A child owes tax on earned income above the standard deduction and on investment income above the kiddie-tax thresholds. Small amounts often owe nothing because they fall under those thresholds, but the obligation exists once income is high enough.