Kiddie Tax: Definition and Examples
Under the kiddie tax, investment income a child makes in 2025 over $2,700 is taxed at their parent or guardian’s income tax rate.
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Managing Editor Most forms of income — tips, gambling winnings, interest and more — are taxable. What some people may not know is that children's income can be taxable, too.
What is the kiddie tax?
The kiddie tax applies to people who are under the age of 18 or dependent students between the ages of 19 and 24 with unearned investment income, such as gains, dividends and interest. In 2025, if a child's unearned income is more than $1,350, it is taxed at the child's tax rate. Unearned income above $2,700 is taxed at their parent or guardian’s tax rate.
The kiddie tax was enacted as a part of the 1986 Tax Reform Act to prevent parents from transferring large amounts of money, such as stock dividends and other investment gains, to accounts held by their children to get lower tax rates
Kiddie tax 2025
The kiddie tax applies to unearned income, not wages or salaries made from employment.
- The first $1,350 of unearned income is tax-free. (Why $1,350? That's the standard deduction for dependents.)
- The next $1,350 of unearned income is taxed at the child's tax rate.
- Any unearned income above $2,700 will be taxed at the parent or guardian's marginal tax rate.
Kiddie tax example
Imagine you bought a share of stock for $2,000 that’s now worth $5,000 and that you’ve held the share for less than a year. If you sell the share, you’ll be taxed on your gains at your ordinary income tax rate, which is based on your taxable income. But if you give that stock to a child whose income is lower than yours, they could likely sell and pay fewer taxes due to their lower income. The kiddie tax is meant to prevent adults from realizing these lower capital gains by funneling investments through minors.
So, in this scenario, the capital gains tax amount would be based on the child and parent’s income. The effect of this is that parents must be aware of any unearned income in their dependents' investment account, even if they’re not trying to pull one over on the IRS.
» Ready to get started? See our picks for the best custodial accounts
The bottom line
If you want to pass down generational wealth and help your kids learn about investing, talking to a tax professional may help you figure out the most tax-efficient way to do so.
The kiddie tax reminds kids and parents that receiving investments as gifts isn't always free, especially if that investment's realized gains or annual unearned income are over a certain amount.
» Learn more: How to find a CPA near you
Next steps
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- 1. Senate Committee on Finance. The Real Effect of the “Kiddie Tax” Change. Accessed Feb 2, 2024.
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