The landscape · Family
The kiddie tax on a child's investment income
The kiddie tax taxes a child's larger investment income at the parents' tax rate instead of the child's own low rate.
Who this exists for. This applies when a child under 18, or a full time student under 24, has investment income above a line set each year. Ticks that show it: I have children under 17; I support a dependent (a child in college, a parent, another adult); I hold investments outside retirement accounts.
How it works
The rule reaches a child under 18 at year end, an 18 year old whose earned income does not cover more than half their support, and a full time student age 19 to 23 in the same position. The first this year's official kiddie tax standard amount (not yet verified here; see the official source below) of the child's unearned income is tax free, the next equal slice is taxed at the child's own rate, and everything above that is taxed at the parents' marginal rate. Unearned income means interest, dividends, capital gains, and similar income, not wages. Parents may be able to report the child's interest and dividends on their own return under conditions the IRS lists, which skips a separate return but adds the income to the parents' figures. Otherwise the child files with a form that pulls in the parents' rate.
What it gives
The first two slices of a child's investment income are still taxed lightly or not at all.
A child's wages are never touched by this rule.
Parents with modest income see little effect, since the parents' rate is what applies.
What it costs, or where the catch is
A custodial account built up for a child can throw off enough dividends to be taxed at a high earner parent's rate.
A college student under 24 can be caught even while living away from home.
It requires either an extra form on the child's return or folding the income into the parents' return.
A worked example
Simone, age 15, has a custodial account her grandmother funded that pays $4,200 in dividends this year. If the tax free slice were $1,300, the first $1,300 is untaxed, the next $1,300 is taxed at Simone's 10 percent rate, which is $130, and the remaining $1,600, which is $4,200 minus $2,600, is taxed at her parents' 24 percent rate, which is $384. Her total tax is $514, far more than if her own rate applied to everything.
Where it goes wrong
The common miss is parents who move stock into a child's name for the lower rate and then find the income taxed at their own rate anyway.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Tax Topic 553, Tax on a child's investment and other unearned income. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The kiddie tax on a child's investment income
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The employee stock purchase plan discount
This exists for a worker whose employer offers an employee stock purchase plan that sells company shares at a discount through payroll.
- The dependent care FSA
This exists for a working parent, or a worker who cares for a dependent who cannot care for themselves, whose employer offers a dependent care flexible spending account.
- Group life and disability insurance through work
This exists for a worker whose employer offers group term life insurance and short or long term disability coverage as benefits.
- I bonds and Treasury bills through TreasuryDirect
This exists for a person holding cash they do not need for a while, who wants to know what the Treasury sells directly to individuals.
- FDIC and NCUA insurance limits and ownership categories
This exists for anyone with money in a bank or credit union, and especially for a person whose balances at one institution are approaching the insured amount.
- Quarterly estimated taxes and the safe harbor
This applies when a person expects to owe at least $1,000 of federal tax beyond what is withheld, which is the usual case for self employed people and those with large investment income.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.