If you're a parent of minor children or of one or more college students, you're likely thinking about them as you prepare to file your 2025 federal tax return or begin tax planning for 2026. Do they make you eligible for the Child Tax Credit? For the Credit for Other Dependents? For education-related tax breaks?
What you might not be thinking about is the "kiddie tax," which could increase taxes on your children's unearned income. Knowing when the kiddie tax applies and how it works can help prevent unpleasant surprises and allow for smarter tax planning.
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A Higher Tax on Unearned Income
The kiddie tax is designed to minimize parents' ability to significantly reduce income taxes by transferring income-producing assets to their children in lower tax brackets. When it applies, some or most income on investments held by the child is taxed at the parents' higher marginal federal income tax rate rather than at the child's rate.
The rule applies only to unearned income. This typically includes interest, dividends, capital gains and similar investment income, often from custodial accounts or investments held in a child's name. Earned income, such as wages from a part-time job or self-employment, isn't subject to the kiddie tax and is taxed at the child's own rate.
Applicability After Age 18
The kiddie tax isn't strictly a tax on minors. It often applies for several years after a child turns 18. Specifically, the kiddie tax may apply if your child is under age 18 at year end or is age 18 at year end and didn't provide more than half of his or her own support through earned income. It can also apply to full-time students from ages 19 through 23 who didn't provide more than half of their own support through earned income.
Beginning the year your child turns 24, the kiddie tax no longer applies. This is true even if he or she is still a student relying on parental support.
Unearned Income Thresholds
If your child is subject to the kiddie tax, it won't apply to all of his or her unearned income. For both 2025 and 2026, the first $1,350 of your child's unearned income will generally be tax-free. The next $1,350 will be taxed at your child's own federal income tax rate. Any unearned income above $2,700 generally will be subject to the kiddie tax and taxed at your marginal federal income tax rate.
As a result, relatively modest investment income can trigger the kiddie tax. For example, custodial accounts holding investments that generate dividends or capital gains distributions can trigger the kiddie tax even when no trading occurs.
Planning Considerations
Before transferring any investment assets to your children or grandchildren, consider the potential kiddie tax consequences. You may want to avoid giving them assets that generate substantial dividends or that are highly appreciated and will generate substantial capital gains when sold—unless they can be held until the child is no longer subject to the kiddie tax.
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If your child already holds investments that could generate income subject to the kiddie tax, you may want to consider traditional tax planning strategies for his or her investments. For instance, you could minimize trading activity or offset realized capital gains by selling other investments in your child's portfolio at a loss.
Does Your Dependent Child Need to File a 2025 Federal Income Tax Return?
Many parents are surprised to learn that their children who are minors or college students—and still claimed as dependents—may be required to file their own federal income tax returns. For 2025, a dependent child generally must file a federal income tax return if any of the following apply:
Unearned income exceeds $1,350. This includes interest, dividends, capital gains and other investment income.
Earned income exceeds $15,750. This includes wages from a job and net earnings from self-employment.
Gross income exceeds the larger of $1,350 or earned income (up to $15,300) plus $450. This rule applies when a child has both earned and unearned income.
Self-employment net earnings equal $400 or more. The child might owe self-employment tax.
When a dependent child isn't required to file a return, doing so can sometimes still be beneficial. For example, filing may allow the child to:
Filing rules for dependents can be confusing, particularly when a child has both earned and unearned income. If you're unsure whether your child should file a 2025 return, ask your SSB tax advisor for help.
Things Can Get Complicated
Calculating the kiddie tax involves several steps, including filing a tax return for the child. Plus, because the child's return relies on information from the parents' tax return, the kiddie tax ties the two together. Suffice it to say, things can get complicated quickly. If your child has unearned income, contact your SSB tax advisor for help determining whether he or she is subject to the kiddie tax, calculating the tax if needed, and aligning tax planning strategies with your overall goals.
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