As parents, you might have done everything right for your children’s financial future. You opened a custodial brokerage account, saving a little extra each year for college. Now, you’re excited to see the five figures saved from stocks that performed well.
But when you try to rebalance the account, the tax rate is high. Much higher. Why is your child’s account taxed at your rate?
Even as an adult, your kids won’t be exempt from the kiddie tax. This misunderstood rule will come back later, so start planning for it before it hides.
What is the Kiddie Tax?
The first thing to know is that it’s not just for kids, despite the name.
Parents assume this tax disappears when their child turns 18, but instead, it can follow them
through age 23.
Based on your child’s status as of December 31 of the tax year, the kiddie tax applies to the following:
- Anyone under age 18.
- An 18-year-old who doesn’t cover more than half of their own living expenses with earned income.
- A full-time student aged 19 through 23 who doesn’t cover more than half of their own support with earned income.
When your child is living mostly on parental support or financial aid, the kiddie tax is almost certainly applicable to their investment income. When they turn 24 or can fully support themselves, then you can say goodbye to that bill.
What are the Kiddie Tax Rules?
There’s a provision designed to stop parents in high tax brackets from shifting investment accounts into their kids’ names.
Why? So parents can’t create a workaround to be taxed at a lower rate.
This provision prevents parents in high tax brackets from moving a stock portfolio to a teenager just to be taxed at close to 0% instead of over 30%.
For the 2026 tax year, the kiddie tax follows the following rules:
- The first $1,350 is tax-free.
- The next $1,350 is taxed at the child’s own rate, depending on the type of income.
- Anything above $2,700 gets taxed at the parents’ rate: long-term capital gains and qualified dividends are taxed at the parents’ capital gains rate, while other unearned income is taxed at the parents’ ordinary rate.
Unearned income covers a list of income types:
- Taxable interest
- Dividends
- Capital gains
- Rents
- Royalties
- Taxable portion of Social Security paid to the child
- IRA distributions
But there’s an important wrinkle when the child also has wages.
A dependent child’s standard deduction for 2026 is the greater of $1,350 or earned income plus $450, up to the regular standard deduction cap. That sounds generous, but for kiddie tax purposes it does not mean wages fully protect investment income dollar-for-dollar. That’s why a child with a small summer job and a moderate amount of dividends or interest can still hit the kiddie tax faster than expected.
Let’s look at an example:
- W-2 wages: $1,200
- Unearned income: $3,500
- Standard deduction: $1,650 ($1,200 + $450)
Because the wages absorb $1,200 of that deduction, only the extra $450 helps with the investment income. The child’s net unearned income, $3,050, exceeds the $2,700 threshold, so the excess $350 is taxed at the parent’s rate.
The kiddie tax does not apply to every child. For 2026, it generally applies if the child’s unearned income exceeds $2,700 and meets the age and support tests. This includes full-time students under age 24 whose earned income is less than half their support.
Your portfolio is taxed, whether you put it under your kid’s name or not.
What You Need to Know About Reporting Kiddie Tax
Your child’s unearned income can be reported in multiple ways.
The first way is the “Parent’s Election to Report Child’s Interest and Dividends.” When both the parent and child meet the requirements, the parent can elect to include the child’s gross income as part of their own. In this case, report a child’s interest, ordinary dividends, and capital gains with their own tax return on
Form 8814.
In certain circumstances, you will need to attach Form 8615, Tax for Certain Children Who Have Unearned Income, to your return. This form calculates how much of their investment income gets taxed at the parents’ rate.
Here’s when that needs to happen:
- Income crosses the $2,700 threshold
- Has at least one living parent
- Isn’t filing a joint return
- Needs to file a Form 1040
As a reminder, if your child is required to file Form 8615, they may be subject to the net investment income tax.
Parents should also keep an eye on investment income coming from accounts they did not personally fund.
Grandparents often set up custodial accounts, gift stock, mutual funds, or cash that later produces interest, dividends, or capital gains in the child’s name. That income still counts when testing whether the child crosses the kiddie tax threshold, whether the parents set it up or not. A child with a small W-2 job and only moderate investment income from family-funded accounts can still end up over the 2026 threshold, with part of that unearned income taxed at the parent’s rate.
It’s important to follow all tax rules regarding your child’s income, and if you’re unsure about any, consider reaching out to an experienced CPA.
Common Questions About the Kiddie Tax
If your family has custodial accounts, trusts, or investment accounts set up for a child, it’s worth asking all the questions to make sure you’re not missing anything.
My child turned 18 this year and has a part-time job. Does the kiddie tax still apply?
An 18-year-old is only exempt if their earned income covers more than half of their own support. If you’re still covering most of their living expenses, the kiddie tax rules can still apply.
What if my child is in college but not living at home?
Living situation doesn’t matter as much as who’s paying the bills. A full-time student aged 19–23 is still subject to the kiddie tax if they don’t provide more than half of their own support, even if they’re away at school.
Can we file our child’s investment income on our own return instead?
If a child’s only income is interest and dividends and falls within certain limits, parents may elect to report it directly on their own return using Form 8814, rather than the child filing separately.
Can we avoid kiddie tax with the new Trump accounts?
Trump accounts are structured as tax-deferred rather than regular taxable investment accounts. However, they do not explicitly provide a blanket kiddie-tax exemption for all future distributions or earnings. Trump accounts may help reduce current annual kiddie-tax exposure compared with ordinary taxable accounts, while shifting the tax consequences to the account’s separate distribution regime.
Families looking to save money for a child without creating current-year unearned income may find them appealing for that reason.
What Adjustments Can You Make Around the Kiddie Tax?
There are a few adjustments you can make to your account to lessen the blow of the kiddie tax.
- Growth over income. Investments that appreciate without throwing off dividends or interest will generate less taxable unearned income annually.
- Timing. Selling appreciated positions once your child ages out of the kiddie tax rules can result in the same gain being taxed at a lower rate once they’re no longer subject to kiddie tax.
- Employment. If your child is on your payroll for legitimate part-time work, that money is earned income, skipping the kiddie tax.
- Qualified Education Expenses. Shifting savings into a 529 grows tax-deferred and comes out tax-free for qualified education expenses. That portion of the family’s college savings is not subject to the kiddie tax.
The kiddie tax rules are full of thresholds, exceptions, and planning windows that most families never hear about until the tax bill lands. When you know the rule ahead of time, you can make smart financial moves.
Working with a CPA can help you identify these opportunities before you flip your family’s plan. At MBE CPAs, we work with families across the country to build tax strategies that hold up from a child’s first savings account through their working years.
You’ve built a strong foundation for your family. Let’s make the right decisions to keep it that way.