Quick Answer
The kiddie tax applies to children under 18 (or under 24 if students) with unearned income over $2,650 in 2026. Income above this threshold is taxed at the parent's highest marginal tax rate, not the child's lower rate, potentially increasing taxes from 10% to 32% or higher.
Best Answer
Diana Flores, Tax Credits & Amendments Specialist
Best for parents who set up UGMA/UTMA accounts or invest for their children
How the kiddie tax works
The kiddie tax prevents families from shifting investment income to children to take advantage of lower tax brackets. For 2026, it applies to unearned income (dividends, interest, capital gains) over $2,650 for children under specific age thresholds.
Here's the three-tier structure:
Example: $5,000 dividend income
Let's say your 12-year-old receives $5,000 in dividends from a UGMA account, and you're in the 24% tax bracket:
Without the kiddie tax, all $3,675 of taxable income would be taxed at 10%, resulting in only $367.50 in taxes—a difference of $329.
Who is subject to the kiddie tax
The kiddie tax applies if the child is:
Types of income affected
Subject to kiddie tax:
NOT subject to kiddie tax:
Planning strategies to minimize impact
1. Time capital gains carefully
Realize gains in years when your tax bracket is lower, or when the child no longer qualifies for kiddie tax treatment.
2. Consider tax-advantaged growth
Invest in growth stocks that don't pay dividends, or use tax-deferred accounts like 529 plans for education expenses.
3. Spread income across multiple years
Instead of selling $10,000 in stocks in one year, consider $3,000 per year to stay under the kiddie tax threshold.
4. Use the child's earned income
If your teenager has a job, their earned income can offset unearned income for kiddie tax purposes.
What you should do
Review your child's investment accounts annually before year-end. If unearned income will exceed $2,650, consider realizing losses to offset gains or deferring income to the following year. Use our return scanner to identify optimization opportunities in previous years.
Key takeaway: The kiddie tax can increase your child's tax rate from 10% to your marginal rate on unearned income over $2,650, making investment timing and account selection crucial for tax-efficient planning.
Key Takeaway: The kiddie tax can increase taxes from 10% to your marginal rate on unearned income over $2,650, making investment timing crucial for families.
2026 Kiddie Tax Income Thresholds and Tax Rates
| Income Range | Tax Treatment | Example Tax (Parent in 24% Bracket) |
|---|---|---|
| $0 - $1,325 | Tax-free (standard deduction) | $0 |
| $1,326 - $2,650 | Child's tax rate (typically 10%) | $132.50 |
| Above $2,650 | Parent's highest marginal rate | $564 on additional $2,350 |
More Perspectives
Michelle Woodard, Tax Policy Analyst
Best for divorced parents navigating kiddie tax with split custody arrangements
Special rules for divorced parents
When parents are divorced, the kiddie tax uses the tax rate of the parent who claims the child as a dependent—regardless of who actually manages the child's investments or receives the investment income.
Custody vs. tax dependency
The key distinction: physical custody doesn't determine which parent's tax rate applies. The parent claiming the dependency exemption determines the kiddie tax calculation, even if:
Example: Different tax situations
If Mom (32% tax bracket) claims the dependency exemption but Dad (12% tax bracket) manages the child's $4,000 annual dividend income:
Planning considerations for divorced families
Form 8615 filing requirements: The child must file Form 8615 if subject to kiddie tax, reporting the claiming parent's tax information—even if that parent doesn't cooperate with tax preparation.
Investment account timing: Consider which parent will claim the child before making investment decisions or realizing gains. Sometimes it's worth adjusting the dependency claim arrangement if investment income is substantial.
Documentation needs: Keep records of which parent claims the child each year, as this determines kiddie tax calculations for multiple years if the child has ongoing investment income.
Key takeaway: For divorced parents, the kiddie tax rate follows the parent claiming the dependency exemption, not who manages the investments—requiring careful coordination of tax planning between ex-spouses.
Key Takeaway: For divorced parents, the kiddie tax rate follows the parent claiming the dependency exemption, not who manages the investments.
Diana Flores, Tax Credits & Amendments Specialist
Best for grandparents who are primary caregivers and manage grandchildren's finances
When grandparents are the primary caregivers
If you're raising your grandchild and claim them as a dependent, the kiddie tax applies using your tax rates—not the biological parents' rates. This can significantly impact tax planning, especially if you're in a higher tax bracket due to retirement income.
Common scenarios for grandparent caregivers
Full legal guardianship: If you have legal guardianship and provide more than half the child's support, you can claim the dependency exemption and the kiddie tax uses your rates.
Informal care arrangements: Even without formal guardianship, if the child lives with you full-time and you provide more than half their support, you likely qualify to claim them as a dependent.
Split year situations: If care arrangements change during the year, determine who provided more than half the support to establish who can claim the exemption.
Tax planning considerations
Higher retirement tax brackets: Many grandparents have substantial retirement income (pensions, 401k distributions, Social Security) that may put them in higher tax brackets than the child's parents would be.
Investment timing strategies: Consider realizing investment gains for the grandchild in years when your income is lower, such as before Required Minimum Distributions begin at age 73.
529 plan advantages: If you're funding education expenses, 529 plans avoid kiddie tax entirely since distributions for qualified education expenses aren't taxable income.
Example: Grandparent in 24% bracket vs. parent in 12% bracket
Grandchild has $4,000 in dividend income:
Sometimes it's worth coordinating with the biological parent about who claims the exemption, considering both kiddie tax implications and other tax benefits like the Child Tax Credit.
Key takeaway: Grandparents raising grandchildren face kiddie tax at their potentially higher tax rates, making investment timing and account selection even more important for minimizing tax impact.
Key Takeaway: Grandparents raising grandchildren face kiddie tax at their potentially higher tax rates, making investment timing crucial.
Sources
- IRS Publication 929 — Tax Rules for Children and Dependents
- IRS Form 8615 — Tax for Certain Children Who Have Unearned Income
Related Questions
Reviewed by Diana Flores, Tax Credits & Amendments Specialist 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.