WHAT IS KIDDIE TAX AND HOW DOES IT WORK?

What you'll learn:

1. What is Kiddie Tax and how does kiddie tax work?

2. Kiddie tax rules and thresholds

3. Who is subject to kiddie tax?

4. What tax rate will my child pay?

5. Kiddie tax examples

   
   

Imagine your kiddo has been raking in money from a side hustle or maybe they just made some savvy investments with that birthday cash you helped them toss into a brokerage account. You're proud. You're impressed. You’re thinking: “Wow, we’re raising the next Warren Buffett!”

But then—bam! Tax season hits, and something called the Kiddie Tax creeps into the picture.

Wait—kids get taxed? Yep, they sure do. And not always the way you'd expect.

The Kiddie Tax may sound like a joke from a comedy sketch, but it’s very real and it’s something every parent, guardian, and mini-mogul should know about—especially if your child earns unearned income like dividends, capital gains, or interest.

What Is Kiddie Tax and How It Works

So, what exactly is the Kiddie Tax?

In simple terms, the Kiddie Tax is a tax rule that was designed to prevent parents from shifting investment income to their children in order to take advantage of their kids’ lower tax rates.

Here’s the logic behind it: If kids were taxed at super-low rates and could earn a bunch of investment income tax-free, parents might move money into their kids' names and dodge a chunk of taxes themselves. Uncle Sam caught on to this little loophole, and thus—the Kiddie Tax was born.

It works like this: your child can earn a certain amount of unearned income (think interest, dividends, capital gains) without paying much or any tax. But once their earnings go above a set limit, the IRS swoops in and taxes that extra income at, you guessed it, your tax rate, not your child's.

So while little Jimmy might be 13 years old and in middle school, his extra investment income could get taxed like a full-blown adult earning six figures.

Kiddie Tax Rules, Limits, and Thresholds

Alright, let’s get into the nitty-gritty.

As of the 2025 tax year, here’s how the Kiddie Tax breaks down:

1. First $1,350 of unearned income – Tax-free! This is your child’s standard deduction for unearned income. No tax is owed here.

2. Next $1,350 – Taxed at your child’s rate (usually a low rate like 10%).

3. Anything over $2,700 – Now taxed at your rate (the parent’s or guardian’s marginal rate). Ouch.

This means if your child earns $3,000 in unearned income, $300 of that will be taxed as if you earned it—not them.

These limits are adjusted annually for inflation, so it’s good to check the IRS website or chat with a tax pro each year to stay current.

A few quick notes:

• These rules only apply to unearned income, not earned income like wages from a summer job.

• The tax kicks in on a per child basis, not total household income.

• You can still open investment accounts for your child—like a custodial brokerage—but keep these thresholds in mind if you’re investing in dividend-heavy stocks or ETFs.

  
  

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Who Is Subject to Kiddie Tax?

Now for the “who’s who” of the Kiddie Tax.

Your child is subject to the Kiddie Tax if they meet all of the following criteria:

1. They are under age 18, or

2. They are age 18 and do not have earned income greater than half of their support, or

3. They are ages 19–23, a full-time student, and again, their earned income does not exceed half of their total support

   
   

Plus:

• The child must be required to file a tax return.

• They must have unearned income (we’re talking dividends, capital gains, etc.)

• They must be claimed as a dependent on your tax return

So yes, even your college student who’s been investing on the side could be pulled into the Kiddie Tax zone.

Also important: If your kid has earned income—like they’re working part-time or doing freelance gigs—that income is taxed at regular rates for their tax bracket and is not subject to the Kiddie Tax.

What Tax Rate Will My Child Pay?

Good question—and it depends.

2025 Kiddie Tax Rules

Let’s say your child earns less than $2,700 in unearned income. Here's what happens:

• The first $1,350 is completely tax-free (no worries there).

• The next $1,350 is taxed at the child's rate—likely a low 10% or 12%

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But once your child earns more than $2,700 in unearned income? That’s when the IRS says, “Nice try,” and starts taxing the excess amount at your marginal tax rate—which could be 22%, 24%, 32%, or even higher depending on your household income.

To be clear:

• This doesn’t mean your child is now in your tax bracket for everything.

• It only means that their unearned income above the threshold gets taxed as if you earned it.

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Kiddie Tax Example With Real Numbers

Let’s run through a quick real-life example to make this crystal clear.

Say 14-year-old Maya has a custodial brokerage account you set up years ago. Thanks to some solid ETF investments and birthday gift money from Grandma, Maya earns $3,500 in dividends and capital gains during the year.

Here’s how the Kiddie Tax would apply:

1. First $1,350 – Tax-free

2. Next $1,350 – Taxed at Maya’s rate (let’s say 10%) = $135 in tax

3. Remaining $800 – Taxed at your rate (let’s say 24%) = $192 in tax

So Maya would owe a total of $327 in taxes on her $3,500 investment income—even though she’s just a kid. And that last chunk got taxed like an adult, thanks to the Kiddie Tax.

If her investment earnings were only $2,600 instead? Only $1,250 of it would’ve been taxed at her low kid-rate, and her tax bill would’ve been much smaller.

So, now what?

At first glance, the Kiddie Tax might seem like an obscure rule buried deep in the IRS playbook. But if you're raising a little investor or helping your child build wealth early, it's definitely something to know about.

The good news? The Kiddie Tax isn’t here to scare you away from investing for your child—it’s just a reminder to plan smart.

Here are a few quick takeaways:

• Unearned income over $2,700 in 2025? That’s when Kiddie Tax kicks in.

• Your child may pay taxes at your rate—even if they’re not old enough to vote.

• You can avoid surprises by choosing growth-focused investments that don't pay large dividends, or by balancing with tax-efficient funds.

• Earned income (like summer jobs or side hustles)? Totally separate from the Kiddie Tax and taxed at your kid’s own bracket.

At KidVestors, we believe in raising financially literate kids who know how to build wealth and navigate the real-world money stuff early. That includes the fine print—like taxes.

Because while it’s fun to celebrate their first stock purchase, it’s even better when they (and you) understand what it means when April rolls around.

Ready to turn your kids into confident, tax-smart investors?

Try KidVestors