The kiddie tax: why your child's investment income gets taxed at your rate

The idea occurs to every investing parent eventually: my tax rate is 24%, my nine-year-old's is basically zero — why not put the brokerage account in her name? Congress noticed this idea in 1986 and built the 'kiddie tax' to kill it. Above a modest threshold, a child's investment income is taxed at the PARENTS' marginal rate, not the child's. The rule catches more families than ever now that custodial accounts are an app away — and it has real edges you can plan around.

Who the kiddie tax applies to

• Children under 18, always.
• 18-year-olds whose earned income doesn't cover more than half their own support.
• Full-time students aged 19–23 who don't support themselves with earned income — yes, the kiddie tax follows most kids through college.
• It applies only to UNEARNED income: interest, dividends, capital gains, and distributions from custodial (UTMA/UGMA) accounts. Wages from a job are never kiddie-taxed — a teenager's paycheck is taxed at the teenager's own rate.

The three-layer math

For 2025, a child's unearned income stacks through three layers. The first $1,350 is tax-free (covered by the child's limited standard deduction). The next $1,350 is taxed at the child's own rate — 10% for ordinary income, often 0% for qualified dividends and long-term gains. Everything above $2,700 is taxed at the parents' marginal rate, as if the parents had earned it themselves. The thresholds adjust for inflation each year.

What the kiddie tax does NOT touch

• Earned income: wages, self-employment, the lifeguarding job. A working teen can earn up to the full standard deduction (~$15,750 in 2025) completely tax-free.
• Roth IRA growth: a custodial Roth funded from a teen's earned income grows outside the kiddie tax entirely — the single best account for a kid with a job.
• 529 plans: growth and qualified withdrawals are tax-free and never touch the child's return.
• Unrealized gains: the kiddie tax only applies when income is actually generated. A custodial account holding a low-dividend index fund realizes almost nothing until shares are sold.

Planning moves that still work

1. Use the $2,700 runway deliberately: realizing up to ~$2,700 of gains in a child's account each year costs little or nothing in tax — a slow, annual 'gain harvest' that steps up the basis over time.
2. Prefer 529s over UTMAs for college money: better tax treatment, better financial aid treatment, and no kiddie tax at all.
3. In custodial accounts, hold growth-oriented, low-distribution index funds rather than dividend payers or bond funds — control WHEN income appears.
4. If your teen has a job, prioritize the custodial Roth IRA up to their earned income (max $7,000) before adding to a taxable custodial account.
5. Time big sales for the year the kiddie tax ends — once the child is 24 (or self-supporting), gains are taxed at their own, usually 0%, rate.
6. Watch the filing mechanics: a child with unearned income over $1,350 may need their own return, or parents can sometimes elect Form 8814 to report it on theirs (often slightly worse math — compare).

Which account for which goal

The table's quiet winner for many families is the last thing anyone considers: just keeping the money in the parents' own account, mentally earmarked for the child. It preserves full control, avoids the kiddie tax question entirely, gets the friendlier parental-asset treatment in financial aid formulas, and — if the goal is an eventual large gift — can be handed over in adulthood using annual exclusions, or inherited later with a stepped-up basis. Titling money in a child's name is sometimes right; it's just rarely the tax win people assume it is.

The bottom line

The kiddie tax makes 'put it in the kid's name' a non-strategy: above $2,700 a year, a child's investment income is taxed as if the parents earned it, usually until the child is out of college. What still works is structural: 529s for education, Roth IRAs for working teens, low-distribution funds in custodial accounts, and deliberate small gain harvests under the threshold. Shift assets for real reasons — teaching, gifting, college — but don't expect the tax bill to move with them.