What Is the Kiddie Tax? A Simple Guide for Families and Investors

The kiddie tax is one of those tax rules that catches many families off guard—especially those who’ve set up investment accounts in their children’s names. It’s a rule designed to prevent parents from shifting income to their kids in an attempt to take advantage of their lower tax rates. But even families with the best intentions can end up paying more tax than expected if they don’t understand how it works. Let’s break it down.

The Basics: What Is the Kiddie Tax?

The kiddie tax is a special tax rule that applies to unearned income (like interest, dividends, and capital gains) earned by a child under age 19 or a full-time student under age 24 (as long as they don’t provide more than half of their own support).

Instead of being taxed at the child’s typically low tax rate, certain unearned income is taxed at the parent’s (usually higher) marginal tax rate.

This rule doesn’t apply to earned income—like a job at the local coffee shop or summer lifeguarding gig. It only applies to unearned income, like investment earnings.

Who Does the Kiddie Tax Apply To?

The kiddie tax typically applies if all of the following are true:

The child is under age 19 (or under 24 and a full-time student).
The child has unearned income above a certain threshold ($2,600 in 2024).
The child is required to file a tax return.
The child does not file a joint return.

How Much Income Is Taxed Under the Kiddie Tax?

For 2024, the tax works like this:

The first $1,300 of unearned income is tax-free (thanks to the standard deduction for dependents).
The next $1,300 is taxed at the child’s rate.
Any unearned income over $2,600 is taxed at the parent’s marginal rate.

So if a child has $5,000 in unearned income:

$1,300 is tax-free
$1,300 is taxed at the child’s rate
$2,400 is taxed at the parent’s rate

Common Scenarios Where Kiddie Tax Comes Up

UGMA/UTMA Accounts – These custodial accounts are often set up to save for a child’s future, but investment earnings in these accounts are subject to the kiddie tax.
Gifts of Stock or Bonds to Children – Transferring appreciated assets to your child may seem like a smart tax move, but if those assets produce income, the kiddie tax can apply.
Family Limited Partnerships – If income is distributed to minor family members, be aware that the kiddie tax may come into play.

Ways to Plan Around the Kiddie Tax

While the kiddie tax can’t always be avoided, there are some strategies to consider:

Keep unearned income under the threshold: Use tax-efficient investments that generate little or no income (like growth stocks or tax-free municipal bonds).
Use Section 529 Plans: Earnings in 529 college savings plans grow tax-free if used for qualified education expenses and are not subject to the kiddie tax.
Time the realization of gains: If your child is about to turn 19 or graduate from school, consider waiting to realize gains until they’re no longer subject to the kiddie tax.
Earned income is still fair game: Encourage teens to work during the summer or part-time—earned income is taxed at their own rate.

Final Thoughts

The kiddie tax is a powerful reminder that even seemingly simple investment decisions for your children can have tax consequences. With a bit of knowledge and proactive planning, families can navigate these rules and make smarter choices about how they save and invest for the next generation.

Have questions about how the kiddie tax might impact your family’s investments? Let’s chat—we’ll help you find a tax-smart strategy that works for you.

Fleming Advisors