The kiddie tax (IRC Section 1(g)) prevents high-income parents from shifting investment income to their children to take advantage of the child's lower tax rate. It taxes a portion of a child's unearned income at the parent's marginal rate.
Who is subject to kiddie tax? - Children under age 18. - Full-time students ages 18 to 23 (if their earned income doesn't exceed half their support).
How it works (2025 thresholds): - First $1,350 of child's unearned income: Tax-free (standard deduction for dependents). - Next $1,350 (total $2,700): Taxed at the child's own tax rate. - Unearned income above $2,700: Taxed at the parent's marginal tax rate (kiddie tax applies).
What counts as unearned income? - Dividends, interest, capital gains, rents, royalties. - Income from a trust or estate passed through to the child. - Does NOT include wages, salaries, or self-employment income (earned income).
Filing: Parents can elect to include the child's investment income on their own return (Form 8814) if the child's income is only from interest, dividends, and capital gains and meets certain thresholds. Otherwise, the child files Form 8615.
Planning: UGMA/UTMA accounts are commonly used for minors but subject to kiddie tax. 529 distributions for education are NOT subject to kiddie tax (distributions are tax-free if used for qualified expenses).
> Exam tip: Kiddie tax = child's unearned income above $2,700 taxed at parent's rate. Applies through age 23 for full-time students. Know the $2,700 threshold and that earned income (wages) is not subject to kiddie tax.