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Kiddie Tax: Definition, Example & 2025-2026 Rules
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do not influence our editors’ opinions or ratingsKiddie Tax: Definition, How It Works in 2025 and 2026, Examples
Under the kiddie tax, a child's investment income over a certain amount is taxed at the parent or guardian’s tax rate.
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She is a graduate of the Maynard Institute's Maynard 200 program, and the National Association of Black Journalists Executive Leadership Academy. She is a two-time winner of the Kansas City Association of Black Journalists' President's Award. She was also founding co-chair of NerdWallet's Nerds of Color employee resource group. Managing Editor + more + moreMost 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.
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?
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.
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.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
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 Senate Committee on Finance. The Real Effect of the “Kiddie Tax” Change. Accessed Oct 9, 2025. .Kiddie tax 2025 and 2026
Kiddie tax 2025 and 2026The kiddie tax applies to unearned income, not wages or salaries made from employment.
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 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.
The next $1,350 of unearned income is taxed at the child's tax rate.For the 2025 and 2026 tax years, any unearned income above $2,700 is taxed at the parent or guardian's marginal tax rate.
For the 2025 and 2026 tax years, any unearned income above $2,700 is taxed at the parent or guardian's marginal tax rate . AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
AD Owe $10,000+ in IRS Back Taxes? Get Trusted Tax Help Today BBB Accredited, $500M+ tax debt resolved, free consultation. Learn moreon Alleviate Tax's website
Kiddie tax example
Kiddie tax exampleImagine 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.
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.
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.» MORE: How a 529 plan can cut your tax bill
» MORE: » MORE: » MORE: How a 529 plan can cut your tax billThe bottom line
The bottom lineIf you want to pass down generational wealth and help your kids learn about investing, talking to a financial advisor or tax professional may help you figure out the most tax-efficient way to do so.
If you want to pass down generational wealth and help your kids learn about investing, talking to a financial advisor or 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.
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.» MORE: How to find a CPA near you
» MORE: » MORE: How to find a CPA near you AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
AD Owe $10,000+ in IRS Back Taxes? Get Trusted Tax Help Today BBB Accredited, $500M+ tax debt resolved, free consultation. Learn moreon Alleviate Tax's website
Next steps
Next stepsTax brackets and federal income tax rates
Tax brackets and federal income tax rates Gifting stocksExplore the different investment accounts for kids
Explore the different investment accounts for kids What is a custodial account?ON THIS PAGE
What is the kiddie tax? What is the kiddie tax? Kiddie tax 2025 and 2026 Kiddie tax 2025 and 2026 The bottom line The bottom line Next steps Next stepsON THIS PAGE
What is the kiddie tax? What is the kiddie tax? Kiddie tax 2025 and 2026 Kiddie tax 2025 and 2026 The bottom line The bottom line Next steps Next steps More like this Investment Basics Taxes Investing How Much Does a Financial Advisor Cost? Most financial advisors charge based on how much money they manage for you. Fees are typically 1% a year but can be lower. 2 By Andrea Coombes, Taryn Phaneuf Do You Need a Financial Advisor? 7 Ways to Tell You may need a financial advisor if you're facing big life changes, don't have financial goals, have complex compensation, high tax bills or for other reasons. Taryn Phaneuf How to Find Cheap or Free Financial Advice Quality financial advice is more accessible than ever — and much of it is free or inexpensive. Here's how to get it. June Sham 3 Steps to Prepare for Your First Financial Advisor Meeting Here's what think about and bring to your first meeting with a financial advisor. June Sham