Parents who open investment accounts for their children often discover the kiddie tax at filing time. Under IRC Section 1(g), a child's unearned income above a threshold is taxed at the parent's marginal rate, which is usually higher than the child's own rate. The rule exists to prevent income shifting from high-bracket parents to their lower-bracket children.
Who Does the Kiddie Tax Apply To?
IRC Section 1(g)(2) covers three groups:
- Children under 19 at year-end, regardless of filing status
- Full-time students ages 19 through 23 who did not earn more than half of their own support
- Any age, permanently and totally disabled, if earned income does not cover more than half of their support
Two situations remove a child from kiddie tax: (1) the child files a joint return with a spouse, or (2) a full-time student earns enough to cover more than half of their own support.
How Net Unearned Income Is Calculated
For a child with no earned income in 2026, the kiddie tax kicks in at $2,700. That threshold equals twice the $1,350 dependent standard deduction floor set by Rev. Proc. 2025-32.
The Form 8615 calculation works in two steps:
- Start with gross unearned income (interest, dividends, capital gains distributions, and most passive income)
- Subtract $1,350 twice (once as the basic dependent standard deduction, once as the required second offset)
The result is net unearned income. Any amount above zero is taxed at the parent's rate. The child's own income, including any remaining unearned income below the threshold, is taxed at the child's rate.
If the child has earned income, the $1,350 floor rises to earned income plus $450, which increases the shelter and reduces net unearned income dollar for dollar.
What Counts as Unearned Income?
Unearned income includes:
- Interest from savings accounts, CDs, and bonds
- Dividends from stocks and mutual funds
- Capital gain distributions from mutual funds
- Taxable scholarship amounts above tuition and fees
Earned income (wages, tips, self-employment) is never subject to the kiddie tax and also helps reduce the exposure as noted above.
How Form 8615 Works
Form 8615 attaches to the child's return. It requires the parent's name, SSN, filing status, and taxable income to compute the rate. The child's net unearned income is essentially layered on top of the parent's income to determine the marginal rate, then that rate is applied only to the child's net unearned income.
If the parents file separately, the custodial parent's figures apply. If the parent has not filed, the child may need to extend or file at the top applicable rate.
Planning Strategies
Shift to growth assets. Dividend-heavy stocks and bond funds generate ordinary income annually. Growth-oriented index funds and I Bonds defer gains until sale, keeping yearly unearned income below $2,700.
Use a 529 plan for education costs. Qualified distributions from a 529 are entirely tax-free, with no unearned income to report on the child's return.
Wait until the child ages out. Once a child turns 19 (or 24 if a full-time student), investment income is taxed at the child's own rate. For long-term capital gains that rate may be 0%. This creates a planning window to harvest gains once the kiddie tax no longer applies.
Time capital gain distributions. Mutual fund year-end distributions can unexpectedly push a child over $2,700. Review fund distribution schedules before December. This is especially relevant if the child holds actively managed mutual funds. For more on structuring year-end income, see our guide to year-end tax planning strategies.
Have questions about the kiddie tax or Form 8615 filing? Contact TS CPA for a free consultation. We respond within the same day.