Kiddie Tax

DEAR TRUST OFFICER:  What is the “kiddie tax” and do I need to worry about it? I have three kids, does that enter into it?—PUZZLED PARENT

DEAR PUZZLED:

The “kiddie tax” was first added to the tax code in the Tax Reform Act of 1986.  The purpose of this tax rule is to prevent shifting financial assets to lower-income family members to take advantage of their low marginal income tax rates.  Until your children have substantial passive income, you won’t need to worry about this.

A child’s earned income (from wages or self-employment) is taxed at the child’s tax rate.  The child’s unearned income (dividends, interest, capital gains, and certain taxable scholarship grants) is taxed separately.  The first $1,350 is tax free, the next $1,350 is taxed at the child’s tax rate, and all unearned income over $2,700 is taxed at the parents’ marginal tax rate.  The rule largely negates any income tax advantage for putting substantial financial assets in the child’s name.

The rule applies to children 17 and younger, to 18-year-olds whose earned income did not meet 50% of their living expenses, and to full-time students age 19-23 who fail the 50% test.  It does not apply if both parents have died, if the child is not required to file a tax return, or if the child files a joint tax return.

The kiddie tax has gotten more attention recently as funding begins for the Trump Accounts, which are essentially IRAs for children for which the usual prerequisite of earned income does not apply.  Distributions from such accounts could be subject to the kiddie tax if taken before the child reaches age 24, assuming the tax rule remains unchanged.

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(August 2026)

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