Kiddie Tax

The Kiddie Tax prevents wealthy parents from shifting investment income to their kids to exploit lower tax brackets. If your child has significant unearned income, they'll be taxed at YOUR marginal rate, not their own.

Who It Applies To:

• Children under age 19, OR
• Full-time students ages 19-23 (if earned income doesn't exceed half their support)

What Income Is Affected: Unearned income only:

• Dividends from stocks
• Interest from bonds/savings
• Capital gains from investments
• Taxable distributions from trusts

NOT affected:

• Wages from jobs (paper route, summer work, etc.)
• Self-employment income

2025 Kiddie Tax Thresholds:

• First $1,300 of unearned income: Tax-free
• Next $1,300: Taxed at child's rate (usually 10%)
• Above $2,600: Taxed at PARENTS' marginal rate

Example: Your 12-year-old has $10,000 in stock dividends. You're in the 32% tax bracket.

• First $1,300: $0 tax
• Next $1,300: $130 (10% rate)
• Remaining $7,400: $2,368 (32% parent rate)
• Total tax: $2,498

If no Kiddie Tax existed (child's bracket): Total tax would be ~$500. The Kiddie Tax cost you an extra $2,000!

Strategies to Minimize:

1. Keep Investment Income Under $2,600: Don't transfer too many dividend-producing assets to children.

2. Use 529 Plans: College savings grow tax-free—no kiddie tax issues.

3. Growth Stocks Over Dividend Stocks: Unrealized capital gains aren't taxed until you sell (can wait until child is older).

4. Roth IRA for Kids: If child has earned income, contributions and growth are tax-free forever.

5. UTMA/UGMA Timing: Wait to realize capital gains until child is 19+ and kiddie tax no longer applies.

When Kiddie Tax Ends:

• Child turns 19 (if not a full-time student)
• Child turns 24 (if full-time student)
• Child provides more than half their own support

Historical Note: Tax Cuts and Jobs Act (2017-2025) temporarily changed kiddie tax to use trust tax rates (even worse!), but 2020 legislation reverted it back to parent rates.