If you’ve ever thought about shifting investments into your child’s name to take advantage of their lower tax bracket, you’re not alone—and the IRS anticipated that strategy. That’s where the kiddie tax comes in.

This rule can have a meaningful impact on families who save or invest for their children, so understanding how it works (and how to plan around it) is essential.

What Is the Kiddie Tax?

The kiddie tax is a set of rules that applies to a child’s unearned income—things like:

Interest
Dividends
Capital gains
Rental income

Instead of all that income being taxed at the child’s typically low tax rate, a portion of it may be taxed at the parent’s higher tax rate.

Why Does the Kiddie Tax Exist?

Before this rule, families could significantly reduce taxes by transferring income-producing assets to their children. Since kids often have little or no income, their tax rate would be very low—or even zero.

The kiddie tax prevents this type of income shifting purely for tax advantages.

Who Does It Apply To?

The kiddie tax generally applies if:

The child is under age 18, OR
Age 18–23 and a full-time student, AND
Does not provide more than half of their own support

How the Kiddie Tax Works (2026 Overview)

For a child’s unearned income, the IRS typically applies this structure:

First portion ($0 - $1,350) → Tax-free (standard deduction for unearned income)
Next portion ($1,351-$2,700) → Taxed at the child’s rate
Remaining income ($2,701+) → Taxed at the parent’s rate

(Exact thresholds adjust slightly each year for inflation.)

Example 1: Basic Investment Income

Scenario:

Emma (age 12) has $5,000 in investment income (dividends & interest) from a brokerage account in her name.
Her parents are in the 24% tax bracket.
For context, to generate $5,000 of interest & dividend income per year, you would need to have a $100,000 portfolio in your child's name, yielding 5%.

How it’s taxed (simplified):

What happens:

A portion of Emma’s income is taxed much higher than expected.

How we mitigate this: Investing in growth stocks with low dividend yields.

Example 2: Capital Gains from a Stock Sale

Scenario:

Liam (age 16) sells stock gifted by his grandparents.
He realizes a $10,000 capital gain.

What happens:

Some of the gain is taxed at Liam’s low rate
But the majority is taxed at his parents’ capital gains rate
Even though the account is in Liam’s name, the tax benefit is limited.

How we mitigate this: Tax gain harvesting each year to reset the child's cost basis while remaining below the $2,700 tax-free/child's rate limit each year.

**What Income Is Not Affected?**

The kiddie tax does not apply to:

Wages or salary (earned income)
Self-employment income

So if your child works a summer job, that income is taxed at their own rate—not yours.

Planning Considerations

The kiddie tax doesn’t eliminate tax planning opportunities—it just changes the strategy.

1. Consider Tax-Advantaged Accounts

529 plans (for education)
Roth IRAs (if the child has earned income)

2. Be Strategic with Investments

Growth stocks (less current income, more long-term appreciation)
Assets that defer taxes rather than generate annual income

3. Watch Timing of Sales

Selling investments in a child’s account can trigger kiddie tax exposure—timing matters.

The kiddie tax limits the ability to shift investment income to children for tax savings—but it doesn’t eliminate smart planning.

With the right approach, families can still:

Build wealth for children
Minimize taxes over time
Stay fully compliant with IRS rules

If you’re managing investments for your children or considering gifting assets, it’s worth running the numbers or working with an advisor to avoid surprises at tax time!

Will

Understanding the Kiddie Tax: What It Is, Why It Exists, and How It Works