Kiddie Tax: Definition and Examples

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.

Certain children younger than 17 may be subject to the "kiddie tax," which their parent or guardian has to pay.

What is the kiddie tax?

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^[0]

Under the kiddie tax, the first $1,250 of a child's 2023 unearned income is not taxed. The next $1,250 is taxed at the child's tax rate. Any unearned income over $2,500 is taxed at their parent or guardian’s marginal income tax rate, using IRS Form 8615.

For tax year 2024 (taxes filed in 2025), the kiddie tax threshold will rise to $2,600.

» Learn more about tax brackets

How does the kiddie tax work, and who does it apply to?

The kiddie tax applies to people with unearned income who are under the age of 18, or dependent students between the ages of 19 and 24. "Unearned income" includes investment gains, dividends and interest. It could take the form of distributions from investments in a custodial account, custodial Roth IRA for kids, or ABLE account, for instance.

Kiddie tax 2023

1. The first $1,250 of unearned income is tax-free. 

2. The next $1,250 of unearned income is taxed at 10%, the lowest tax bracket for income tax filers.

3. Any unearned income above $2,500 will be taxed at their parent’s marginal rate.

Why $1,250? That's the standard deduction for dependents^[0]

Kiddie tax example

Imagine you bought a share of stock for $50 that’s now worth $100, and that you’ve held the share for more than a year. If you sell the share, you’ll be taxed at capital gains tax rates — either 0%, 15%, or 20% — based on your taxable income. But if you give that stock to a child whose income is lower than yours, they could likely sell it at a lower capital gains rate than you. The kiddie tax is meant to prevent adults from realizing these lower capital gains by funneling investments through minors.

So, in this scenario, if the sale of that stock netted more than $2,500, the capital gains tax amount above that would be based on the parent’s income, not the child’s. 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

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