Quick Answer
Children under 19 (or 24 if students) with unearned income over $1,300 may owe kiddie tax, taxing investment income at their parents' marginal rate instead of their own 0% or 10% rate. For 2026, the first $650 is tax-free, the next $650 is taxed at the child's rate, and amounts over $1,300 face potential kiddie tax at parents' rates up to 37%.
Best Answer
Michelle Woodard, Tax Policy Analyst
Parents who have set up custodial accounts, 529 plans, or whose children have inherited investments and need to understand tax implications
Understanding the kiddie tax rules
The kiddie tax prevents parents from shifting investment income to children to take advantage of lower tax brackets. For 2026, children under 19 (or under 24 if full-time students) with unearned income over $1,300 may be subject to kiddie tax, which taxes their investment income at their parents' marginal tax rate.
Here's how the 2026 kiddie tax thresholds work:
Example: Child with $5,000 in dividend income
Let's say your 16-year-old daughter Emma has a custodial account that generated $5,000 in dividends in 2026, and your family's marginal tax rate is 24%:
Without kiddie tax (if it didn't exist):
With kiddie tax:
Kiddie tax calculation methods
You have two options for calculating and paying kiddie tax:
Option 1: File separate return for child (Form 8615)
The child files their own Form 1040 with Form 8615 attached. You'll need to provide information about your income and tax situation. The child's investment income over $1,300 is taxed at your marginal rate.
Option 2: Include on parent's return (Form 8814)
If the child's only income is interest and dividends under $11,000, you can elect to include it on your return using Form 8814. This is simpler but may result in slightly higher taxes and affects various income-based calculations.
Income thresholds and filing requirements
*Assumes no earned income*
Strategies to minimize kiddie tax impact
Timing of income: Consider the timing of investment sales and dividend distributions. Spreading income across multiple years can keep each year under the $1,300 threshold.
Tax-advantaged accounts: Use 529 education savings plans instead of custodial accounts when possible. 529 growth is tax-free, and qualified distributions aren't subject to kiddie tax.
Tax-efficient investments: Choose investments that generate tax-free income (municipal bonds) or focus on growth rather than current income to defer taxation until the child reaches age 19.
Earned income strategy: Encourage children to earn income through jobs. Earned income isn't subject to kiddie tax, and the child gets their own standard deduction ($15,000 in 2026) to offset both earned and unearned income.
Special situations and exceptions
Student status: Children who are full-time students remain subject to kiddie tax until age 24, unless they file joint returns or their earned income provides more than half their support.
Married children: Kiddie tax doesn't apply to married children who file joint returns.
Support test: If the child's earned income provides more than half their own support, kiddie tax doesn't apply regardless of age.
Record-keeping requirements
Maintain detailed records of:
What you should do
1. Calculate total unearned income: Add up all interest, dividends, and capital gains for your child's accounts
2. Determine filing requirements: Children with unearned income over $1,300 typically must file returns
3. Choose calculation method: Decide between filing a separate return for your child (Form 8615) or including income on your return (Form 8814)
4. Consider quarterly payments: If kiddie tax will be substantial, make estimated payments to avoid underpayment penalties
5. Review investment strategy: Consider repositioning investments to minimize future kiddie tax impact
Use our return scanner to check if you've properly handled kiddie tax in previous years — many families miss these requirements and face penalties.
Key takeaway: Children with investment income over $1,300 face kiddie tax at their parents' marginal rate (potentially 24-37%), making tax planning crucial for custodial accounts and inherited investments.
*Sources: [IRS Publication 929](https://www.irs.gov/pub/irs-pdf/p929.pdf), [IRS Form 8615 Instructions](https://www.irs.gov/pub/irs-pdf/i8615.pdf)*
Key Takeaway: Children with investment income over $1,300 face kiddie tax at their parents' marginal rate (potentially 24-37%), making tax planning crucial for custodial accounts and inherited investments.
2026 kiddie tax thresholds and tax rates for children with investment income
| Unearned Income Range | Tax Rate Applied | Who's Rate | Example Tax (24% parent bracket) |
|---|---|---|---|
| $0 - $650 | 0% | Tax-free | $0 |
| $651 - $1,300 | Child's rate | 10% typically | $65 on $650 |
| $1,301 - $5,000 | Parent's rate | 24% example | $888 on $3,700 |
| Over $5,000 | Parent's rate | 24-37% depending | Continues at parent's rate |
More Perspectives
Diana Flores, Tax Credits & Amendments Specialist
Grandparents who want to give investment gifts to grandchildren but need to understand tax implications
Gift strategies that minimize kiddie tax
As a grandparent, you want to help build your grandchildren's financial future, but investment gifts can trigger unexpected tax consequences. Understanding kiddie tax helps you structure gifts more effectively.
Instead of giving dividend-paying stocks that immediately generate taxable income, consider:
Timing your gift distributions
If you're funding a custodial account, consider spreading contributions across multiple years to keep annual investment income under the $1,300 kiddie tax threshold. A $50,000 gift generating 4% annually produces $2,000 in income — well above the threshold. But $25,000 this year and $25,000 next year keeps each year's income closer to $1,000.
Working with parents on tax planning
Coordinate with your grandchild's parents to understand their tax situation. If the parents are in a high tax bracket (32% or 37%), kiddie tax makes investment gifts less attractive. If they're in lower brackets (12% or 22%), the impact is more manageable.
Key takeaway: Structure investment gifts to minimize immediate taxable income through growth investments, 529 plans, or spreading gifts across multiple years.
Key Takeaway: Structure investment gifts to minimize immediate taxable income through growth investments, 529 plans, or spreading gifts across multiple years.
Michelle Woodard, Tax Policy Analyst
Parents dealing with children who inherited investments and need to understand which parent handles the tax obligations
Kiddie tax with divorced parents
When your child inherits investments and you're divorced, determining whose tax rate applies for kiddie tax calculations can be complex. The IRS looks to the "custodial parent" — typically the parent with whom the child lived for more nights during the year.
If parents have exactly equal custody (182-183 nights each), the parent with higher adjusted gross income is considered the custodial parent for kiddie tax purposes. This means their marginal tax rate applies to the child's investment income over $1,300.
Filing responsibilities and coordination
The custodial parent's tax information is used for kiddie tax calculations, but either parent can actually file the child's return and pay the tax. However, the non-custodial parent will need tax information from the custodial parent to complete Form 8615.
If you're the non-custodial parent managing your child's inherited investments, you'll need:
This coordination can be challenging in contentious divorces, so consider appointing a tax professional to handle the child's return neutrally.
Strategic considerations
In some cases, it may be beneficial for the lower-income parent to become the custodial parent (for tax purposes) by adjusting custody arrangements slightly. Moving from 45% to 55% custody could significantly reduce kiddie tax obligations if there's a substantial income difference between parents.
Key takeaway: For divorced parents, kiddie tax uses the custodial parent's tax rate, potentially making custody arrangements a significant factor in investment tax planning.
Key Takeaway: For divorced parents, kiddie tax uses the custodial parent's tax rate, potentially making custody arrangements a significant factor in investment tax planning.
Sources
- IRS Publication 929 — Tax Rules for Children and Dependents
- IRS Form 8615 Instructions — Tax for Certain Children Who Have Unearned Income
- IRS Form 8814 Instructions — Parents' Election To Report Child's Interest and Dividends
Reviewed by Michelle Woodard, Tax Policy Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.