The kiddie tax explained: 2026 thresholds and Form 8615

Open a custodial brokerage account for a newborn, fund it for eighteen years, and you have done something quietly generous — and quietly taxable. The Internal Revenue Service built the kiddie tax precisely to keep that generosity from doubling as a tax dodge. Before 1986, a high-earning family could shift a pile of dividend-paying stock into a child’s name, let the income fill up the child’s empty low brackets, and shave the household tax bill. The kiddie tax slammed that window shut by routing a child’s investment income back through the parent’s marginal rate once it grows past a modest threshold.

The rule sounds punitive and is often described that way, but it is narrower than its reputation. It touches only unearned income — the interest, dividends, and capital gains a child’s money throws off while the child sleeps — and it leaves a tax-free floor and a child’s-rate band underneath. Whether it ever costs your family a dollar is pure arithmetic: how much the account earns, where the 2026 thresholds fall, and whether the income is the kind the rule actually reaches.

For the 2026 tax year, the first $1,350 of a child’s unearned income is tax-free, covered by the dependent’s standard deduction. The next $1,350 — the band from $1,350 to $2,700 — is taxed at the child’s own low rate. Everything above $2,700 is taxed at the parent’s marginal rate and computed on Form 8615, attached to the child’s return. The tax reaches a child under 18, an 18-year-old whose earned income did not exceed half of their support, or a full-time student aged 19–23 under the same support test. Crucially, earned income — wages, self-employment — is never subject to the kiddie tax.

What counts as unearned income — and what doesn’t

The whole rule turns on one distinction, so it pays to get it exactly right. Unearned income is money your child’s money makes: taxable interest from a savings account or bond, ordinary and qualified dividends, realized capital gains, taxable scholarship amounts, and the income generated inside a custodial account held under the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act — the UTMA and UGMA accounts that grandparents love to open. All of it can be dragged up to the parent’s bracket.

Earned income is the opposite, and it is the central planning lever. Wages from a job, tips, and net self-employment income are never subject to the kiddie tax — they are always taxed at the child’s own rate, however high the dollar figure climbs. A 16-year-old who earns $7,000 lifeguarding pays tax on those wages at a teenager’s rate, full stop. That asymmetry is why the most effective kiddie-tax planning often has nothing to do with investments and everything to do with putting a child to work. Where the line between the two sits also shapes whether a dependent benefits from the standard deduction or itemizing, since the dependent’s standard deduction is what shelters that first $1,350.

The three-tier structure in 2026

The 2026 thresholds, set by IRS Revenue Procedure 2025-32, stack into three bands. The first $1,350 of unearned income is absorbed by the dependent’s standard deduction and pays nothing. The second $1,350 — income between $1,350 and $2,700 — is taxed at the child’s own rate, typically 10%. Only dollars above $2,700 cross into the parent’s marginal rate, and that crossover is what Form 8615 exists to calculate.

Band of unearned income (2026)	Taxed at
First $1,350	0% (dependent standard deduction)
Next $1,350 ($1,350–$2,700)	Child’s own rate (often 10%)
Above $2,700	Parent’s marginal rate

Because the thresholds are indexed for inflation, they tend to drift upward each year, so a figure you memorized two seasons ago is probably stale. Note too that the kiddie tax interacts with the rest of a household’s return: a child’s investment income can nudge a family’s own modified adjusted gross income calculations when the parent elects to report it directly, an interaction the next section makes concrete.

A worked example: $4,000 in a custodial account

Consider a child — call her Maya — whose UTMA account paid $4,000 in dividends during 2026. Her parents sit in the 24% federal bracket; Maya’s own rate is 10%. The kiddie tax slices her $4,000 into the three bands and applies a different rate to each, which is the only way to compute it correctly.

The first $1,350 is tax-free. The next $1,350 is taxed at Maya’s 10%, producing $135. The remaining $1,300 — the slice from $2,700 up to $4,000 — is taxed at her parents’ 24%, producing $312. Add the taxed bands together and Maya’s kiddie tax comes to about $447.

Band	Amount	Rate	Tax
First $1,350 (tax-free)	$1,350	0%	$0
Next $1,350 (child’s rate)	$1,350	10%	$135
Above $2,700 (parents’ rate)	$1,300	24%	$312
Total	$4,000	—	≈ $447

The lesson the table teaches is one of magnitude. Had Maya’s account thrown off only $2,700, her kiddie tax would have been $135 — the entire parent’s-rate problem lives in that top band. Keeping an account’s annual realized income near or below the ceiling, rather than far above it, is where the real money is saved, and harvesting losses in a taxable account is one way to trim the dividends-plus-gains figure that lands in that top band.

Form 8615 versus Form 8814: who files what

There are two ways the income reaches the IRS, and choosing badly is a common, expensive mistake. The default is Form 8615, attached to the child’s own return. It is required whenever a child’s unearned income exceeds $2,700 and the age and support test is met, and it is the more flexible of the two because it accommodates capital gains, which often qualify for preferential rates.

The alternative is Form 8814, the parental election. It lets a parent fold the child’s income onto the parent’s return and skip filing a separate return for the child altogether. The convenience is real, but it is hemmed in: Form 8814 is available only when the child’s income is solely interest and dividends within set limits, and because it runs the income through the parent’s return less efficiently, it frequently produces a higher total bill than Form 8615 would. The election trades a few minutes of paperwork for what can be a meaningful tax premium — worth modeling both ways before you commit. Where capital gains are in the mix, the spread can widen further, since the child’s return can apply the lower long-term capital gains rates that Form 8814 may blunt.

The caveats that actually bite

The first trap is the age and support test, which most families read too narrowly. The kiddie tax does not stop at the eighteenth birthday. It reaches any child under 18; an 18-year-old whose earned income did not exceed half of their own support; and a full-time student aged 19 through 23 whose earned income likewise did not exceed half of their support. That last clause snares college students with brokerage accounts and modest part-time jobs more often than parents expect — the rule can follow a child well into their twenties.

The second trap is assuming the threshold is fixed. It is indexed, so it climbs, and planning to last year’s number can leave income stranded in the parent’s-rate band you thought you had avoided. The third is the Form 8814 reflex described above: the convenient election is the one that quietly costs more, and it should never be the default choice simply because it spares a second return.

Who should worry about this — and the levers that defuse it

A family whose custodial account holds a few thousand dollars in a plain index fund will rarely brush the $2,700 ceiling; for them the kiddie tax is a non-event. It becomes a live concern when an account is large, income-heavy, or actively traded — a grandparent’s decade-old UTMA stuffed with dividend stocks, or an account realizing big gains in a single year. Those are the households for whom the planning levers earn their keep.

Three levers defuse the rule by using its own definitions. A custodial Roth IRA, funded from the child’s earned income, sidesteps the kiddie tax entirely and compounds tax-free for decades — the single most powerful move available to a working teenager, and worth understanding alongside how a Roth IRA works. Holding tax-efficient assets — broad index funds, municipal bonds, or I bonds whose interest defers until redemption — keeps a custodial account’s annual unearned income under the $2,700 ceiling in the first place. And channeling college money into a 529 plan, whose growth is never treated as the child’s unearned income, removes it from the kiddie tax’s reach altogether, which is part of why the state-by-state 529 landscape rewards a careful look. The kiddie tax is real, but it is also one of the few corners of the code where reading the definitions closely hands you the answer.

Sources

• IRS — Instructions for Form 8615 (Tax for Certain Children Who Have Unearned Income) — when the form is required, the three-tier computation, and the age and support test.
• IRS — Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) — definition of unearned income, the Form 8814 parental election, and its limits.
• IRS — Revenue Procedure 2025-32 — 2026 inflation-adjusted amounts, including the $1,350 and $2,700 thresholds.

This article is educational and not tax advice; thresholds are inflation-indexed and change yearly, and your situation may differ — confirm the current figures and consult a qualified tax professional before filing.