The Kiddie Tax: Rates, Limits and Rules for 2025

The kiddie tax is a set of tax rules designed to prevent parents from reducing their tax burden by shifting investment income to their children. It applies to children under the age of 18, or dependent full-time students under 24, who have unearned income from investments.The tax rate for the kiddie tax follows the parents’ marginal tax rate once the child’s unearned income exceeds a certain threshold, which is adjusted annually. Understanding these limits and how the kiddie tax is applied can help manage potential tax implications on a child’s investment earnings. A financial advisor can also work with you to develop a tax strategy and manage investments.

What Is the Kiddie Tax?

The kiddie tax was introduced in 1986 as part of the Tax Reform Act to prevent high-income families from avoiding taxes by transferring investments to their children.

Before the kiddie tax, parents could reduce their overall tax burden by taking advantage of the lower tax rates applied to children’s unearned income. Congress passed legislation for the kiddie tax and the Internal Revenue Service (IRS) oversaw and enforced it, closing this loophole and ensuring that investment income transferred to minors gets taxed at rates comparable to the parents’ rates.

Each year, there is a certain amount of unearned income that can be taxed at the child’s rate before the kiddie tax applies. For income above this limit, the child is taxed at the parents’ higher rate. This structure helps to prevent families from using children’s investment accounts as a tax shelter, while still allowing minors to benefit from having their own savings and investments.

Who Does the Kiddie Tax Apply To?

The kiddie tax applies to children under the age of 18 and dependent full-time students who are at least 19 but under 24 years old. The tax primarily targets minors and young adults whose unearned income, such as dividends, interest and capital gains, exceeds the annual threshold set by the IRS. The kiddie tax does not apply to earned income like wages or salaries, which are taxed at the child’s own rate.

To determine if a child is subject to the kiddie tax, several factors are considered. First, is the child’s age. They must be under 18 or, if between 19 and 23, they must be a full-time student. Additionally, the child must have unearned income exceeding the annual threshold, which is $2,600 for the 2024 tax year and $2,700 for the 2025 tax year.

If the child is age 18 at the end of the tax year, they cannot earn more than half of their own support for the tax year. Meeting these criteria, any unearned income above the threshold will be taxed at the parents’ higher marginal tax rate rather than the child’s lower rate.

Kiddie Tax Thresholds and Brackets for 2025

A mother consulting a tax expert over the phone.

The kiddie tax thresholds are set by the IRS and adjusted annually to account for inflation. In 2025, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate and any amount above $2,700 is taxed at the parents’ rate. These numbers are up from 2024, when they were $1,300, $1,300 and $2,600, respectively.

As an example, let’s take a 16-year-old who receives $5,000 in unearned income from dividends and interest on their investment account. Here’s how their income will be taxed under the 2025 kiddie tax rules:

The first $1,350 of their unearned income is tax-free.
The next $1,350 is taxed at the 16-year-old’s own tax rate, which, for example, could be 10%. This would result in a $135 tax on this portion.
The remaining $2,300 ($5,000 – $2,700) will be taxed at their parents’ marginal tax rate. If their parents are in the 32% tax bracket, the $2,300 will be taxed at 32%. This would result in $736 of additional tax.

In this case, the 16-year-old would pay $135 in taxes at their own rate and $736 at their parents’ rate, for a total tax of $871 on $5,000 of unearned income.

Reporting and Paying the Kiddie Tax

To report and pay the kiddie tax, parents can choose between two methods:

Have the child file their own tax return: If the child’s unearned income is more than $2,600 in 2024 or $2,700 in 2025, the child must file their own tax return using IRS Form 8615, “Tax for Certain Children Who Have Unearned Income.” This form calculates the amount of tax owed at the parents’ higher marginal rate for income above the threshold.
Include the child’s unearned income in their tax return: Alternatively, if the child’s gross income is less than $13,000 in 2024 or less than $13,500 in 2025, parents may elect to include the child’s unearned income on their own tax return using IRS Form 8814, “Parents’ Election to Report Child’s Interest and Dividends.” This method can simplify the process but may increase the parents’ taxable income.

In both cases, the tax must be paid by the federal filing deadline, typically April 15, to avoid penalties or interest on unpaid taxes.

How to Avoid the Kiddie Tax

While the kiddie tax is designed to prevent families from shifting investment income to their children to take advantage of lower tax rates, there are strategies that can help you to minimize or even avoid it.

One approach is to manage the child’s unearned income to stay below the annual threshold. For example, by limiting the amount of income-generating investments that produce dividends and interest, parents can keep their child’s income remains under $2,600 in 2024 or $2,700 in 2025, avoiding the kiddie tax altogether.

Another strategy is to prioritize investments that generate little or no taxable income. For example, investing in growth-oriented stocks that focus on capital appreciation rather than dividend payouts, or utilizing tax-efficient investments such as tax-free municipal bonds, can reduce unearned income. Additionally, families can invest through tax-advantaged accounts like 529 college savings plans or Roth IRAs (if the child has earned income), where the earnings grow tax-free or are subject to more favorable tax treatment.

Parents can also encourage their children to earn their own income. Since earned income is taxed at the child’s rate and not subject to the kiddie tax, having a part-time job or side business can reduce the proportion of a child’s income that comes from investments.

Kiddie Tax and College Savings Plans

College-focused savings and investment accounts interact with the kiddie tax in different ways.

529s. Earnings inside a 529 plan grow tax-deferred and are tax-free when used for qualified education expenses. Because qualified 529 distributions are not taxable, they do not generate unearned income and do not trigger the kiddie tax.
UGMAs/UTMAs. By contrast, earnings in a custodial UGMA/UTMA account are taxable each year. Dividends, interest, and realized capital gains in these accounts are the child’s unearned income and count toward the annual kiddie tax thresholds.
Roth IRAs. A third category is a Roth IRA for a minor with earned income; contributions come from wages or self-employment income, so contributions themselves are not unearned income and do not implicate the kiddie tax. Investment earnings inside the Roth grow tax-deferred and can be tax-free if withdrawn under qualified rules later.

Taxable 529 distributions are treated differently. If a 529 plan withdrawal is not qualified, the earnings portion is included in income for the distributee and is generally subject to the 10% additional tax on earnings. Those taxable earnings may be treated as unearned income to the beneficiary; if the beneficiary is a child subject to Form 8615 rules, the kiddie tax can apply to that unearned portion.

Custodial accounts, on the other hand, create annual unearned income by design, so they are the most common source of kiddie-tax exposure when families save outside of tax-advantaged plans.Here’s another example.

Assume that a 16-year-old has $3,000 of dividends in a UGMA during 2025. Under the 2025 kiddie tax thresholds, the first $1,350 is not taxed, the next $1,350 is taxed at the child’s rate, and the remaining $300 is taxed at the parents’ marginal rate.
If the parents are in the 32% bracket and the child’s bracket on that slice is 10%, the tax on the $3,000 would be $135 at the child’s rate plus $96 at the parents’ rate. If the same $3,000 of investment return accrued inside a 529 and was later used for qualified education expenses, there would be no current tax and no kiddie-tax exposure on that qualified use.
If the same teen instead earned wages and contributed $3,000 to a Roth IRA (up to the annual IRA limit or earned income, whichever is lower), that contribution would not create unearned income; future qualified withdrawals of earnings would be tax-free, and nonqualified withdrawals of earnings could be taxable, but contributions can be withdrawn tax- and penalty-free.

Account structure also affects when and how income is realized.

Custodial accounts report earnings each year, and selling assets can trigger capital gains that may exceed the kiddie-tax limit. In contrast, 529 plans delay taxes unless the money is used for nonqualified expenses, so gains don’t count as current income. Roth IRAs also defer taxes on earnings and don’t require withdrawals during the owner’s life, so they don’t affect kiddie-tax rules.

Bottom Line

The kiddie tax helps prevent families from reducing their taxes by shifting investment income to children. Unearned income exceeding annual thresholds is taxed at the parents’ marginal rate, making it harder to use a child’s lower tax bracket as a loophole. Using tax-advantaged accounts, prioritizing growth-focused investments and encouraging earned income can reduce or avoid the kiddie tax.

Tax Planning Tips

A financial advisor can help you develop a financial planning strategy that accounts for taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much you could pay in taxes for the sale on an investment, SmartAsset’s capital gains calculator could help you get an estimate.