Kiddie Tax Calculator: How Investment Income Is Taxed for Minors

Before 1986, wealthy parents could shift investment income to their children to be taxed at the child's much lower rate. Congress closed that with the kiddie tax, which forces certain children's unearned income to be taxed at their parents' marginal rate.

If you are investing in a custodial account (UGMA/UTMA) for your child, the kiddie tax affects how much of those returns actually accrue tax-free.

Who the Kiddie Tax Applies To

The kiddie tax applies to children who meet all of these conditions:

1. Under age 19, OR under age 24 if a full-time student
2. Has at least one living parent
3. Unearned income exceeds $2,500 (the 2026 threshold)
4. Not filing a joint return

A 20-year-old who works full-time and supports themselves is generally exempt. A 22-year-old college student with trust fund income is subject to it.

The 2026 Kiddie Tax Thresholds

| Income Layer | Tax Treatment | |-------------|---------------| | First $1,300 | Tax-free (standard deduction for dependents) | | Next $1,300 | Taxed at child's rate (usually 10%) | | Above $2,600 | Taxed at parents' marginal rate |

The $2,600 threshold is adjusted annually for inflation (roughly $100 increases per year).

A Worked Example

16-year-old, $10,000 in investment income (dividends and capital gains), parents in 32% bracket:

| Layer | Amount | Rate | Tax | |-------|--------|------|-----| | First $1,300 | $1,300 | 0% | $0 | | Next $1,300 | $1,300 | 10% | $130 | | Above $2,600 | $7,400 | 32% (parents' rate) | $2,368 | | Total | $10,000 | | $2,498 |

Without the kiddie tax (if taxed entirely at child's rate with no other income):

• Tax on $10,000 at 0-10%: roughly $870

The kiddie tax costs an additional $1,628 in this scenario.

UGMA vs 529: The Tax Comparison

For college savings, the kiddie tax is one reason 529 plans are often more efficient than UGMA/UTMA accounts:

| Feature | UGMA/UTMA | 529 Plan | |---------|-----------|---------| | Investment growth | Taxable (kiddie tax) | Tax-free | | Withdrawal taxation | Capital gains | Tax-free for education | | Control over funds | Child owns at age 18-21 | Account owner controls | | Financial aid impact | More harmful | Less harmful |

For pure education savings, 529 plans dominate. UGMA accounts are useful for non-education savings and for children who may want flexibility in how they use the funds.

The Election to Include Child's Income on Parent's Return

If your child's only income is investment income under $11,500, you can elect to include it on your own return (Form 8814) instead of filing a separate return. This simplifies filing but may result in slightly higher tax if it pushes you into a higher bracket.

The election is generally beneficial when:

• Your child's investment income is small ($500-$2,000 range)
• You do not want to file a separate return for your child

When the Kiddie Tax Does Not Apply

• Child has earned income that exceeds their unearned income (working teenager)
• Child is 24 or older
• Child is not a full-time student between 19-23
• Parents' marginal rate is lower than the child's (rare, but possible)

What to Do With UGMA Accounts

If you have existing UGMA balances for a child in a high-bracket household, the kiddie tax is a cost but not a reason to abandon the account. Once the child turns 24 and the kiddie tax no longer applies, or once the child enters a low-income period (first year of work, grad school), it may be optimal to realize gains when the child's rate is low.

See Best Investing Platforms for UGMA and custodial account options with low fees.

Use the CalcMoney Compound Interest Calculator to model a child's custodial account growth with different tax drag assumptions.

Frequently Asked Questions

Does the kiddie tax apply to qualified dividends and long-term capital gains?

Yes, but the rate applied is still the parent's qualified dividend/capital gains rate, not the parent's ordinary income rate. If parents are in the 32% bracket, their long-term capital gains rate is 15%. So the child's long-term gains above $2,600 are taxed at 15%, not 32%.

Does the kiddie tax apply to earned income?

No. The kiddie tax only applies to unearned income (dividends, interest, capital gains, rental income). A child who earns $15,000 from a summer job pays tax at their own rate on all of it.

What forms are used for the kiddie tax?

Form 8615 is attached to the child's return to calculate the tax using the parents' rate. If using the parental election to include the child's income, Form 8814 is attached to the parents' return.