Navigating the 2026 Kiddie Tax Thresholds: How Your Child’s Investment Income Is Taxed

When family gifts are invested in your child’s name, the growth belongs to your child, and so does the tax on it. In most years that tax is small or nothing at all. But once a child’s investment income passes a set amount, the IRS taxes the excess at the parents’ rate instead of the child’s. That rule is known as the kiddie tax.

For 2026, the first $1,350 of a child’s investment income is tax-free, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is generally taxed at the parents’ rate. Those are the amounts set in IRS Revenue Procedure 2025-32, the same as for 2025, and they apply to 2026 income reported on returns filed in 2027, as the IRS noted when it announced them.

This guide, part of our Ultimate Guide to Building a Generational Nest Egg for Your Child, is for parents who invest for a child in a custodial account, such as a UTMA or UGMA, or who are deciding where family gifts should go. It explains who the kiddie tax applies to, how it’s figured, how large an account has to get before it matters, how to file, and the practical ways families keep it small.

What is the kiddie tax?

The kiddie tax is a federal rule that taxes part of a child’s investment income at the parents’ tax rate. Congress created it in the Tax Reform Act of 1986 to keep parents from cutting their own taxes by putting investments in their children’s names, where the income would be taxed at the children’s lower rates, the Congressional Research Service explains.

Despite the name, it isn’t an extra tax on top of the regular one. It’s a method for figuring part of your child’s regular income tax. Your child still files their own return and owes the tax; the rule decides which rate applies to their investment income above the threshold. That income is taxed at the parents’ rate only if the parents’ rate is higher than the child’s, according to the IRS Instructions for Form 8615, the form used to figure it.

If you’ve read about “trust rates”

Some older articles say a child’s investment income is taxed at the rates for trusts and estates. That was true only briefly. The 2017 tax law switched the kiddie tax to trust and estate rates for 2018 and 2019, and because those brackets reach the top rate at low income levels, some families owed more. Congress repealed the change in December 2019, restoring the parents’-rate method starting in 2020 and letting families apply it retroactively to 2018 and 2019, the Congressional Research Service notes. For a sense of how steep trust rates are, trusts and estates reach the top 37% rate above just $16,000 of taxable income in 2026, according to Rev. Proc. 2025-32.

The 2026 kiddie tax thresholds

For 2026, a child’s unearned income, which is mostly interest, dividends, and capital gains, is taxed in three slices:

• The first $1,350 is tax-free. It’s covered by the standard deduction for a child who can be claimed as a dependent, which is $1,350 in 2026 for a child with no earned income.
• The next $1,350 is taxed at your child’s rate. That’s usually 10% for interest and 0% for long-term capital gains and qualified dividends, because a child’s taxable income is so low.
• Everything above $2,700 is taxed at your rate, if yours is higher. The IRS calls this slice net unearned income.

• Tax-free (first $1,350)
• Child’s rate (next $1,350)
• Your rate (above $2,700)

For a child under 18 with no earned income or itemized deductions. Income above $2,700 is taxed at your rate only if it’s higher than your child’s.

Show the numbers

Income	Tax-free	Child’s rate	Your rate
$2,000	$1,350	$650	$0
$5,000	$1,350	$1,350	$2,300
$10,000	$1,350	$1,350	$7,300

Two details trip up a lot of parents. First, “your rate” means your marginal rate: the rate on your next dollar of income, figured as if the slice over $2,700 were added to your own taxable income. It isn’t automatically the top 37% rate. Second, long-term capital gains and qualified dividends keep their lower capital gains rates when they’re taxed at your rate, because Form 8615 figures that tax with the capital gains worksheet and your filing status. For married couples filing jointly with taxable income between $98,900 and $613,700 in 2026, that rate is 15%, even though most of that income range falls in the 22% to 35% ordinary brackets.

If your child also has a job, their standard deduction grows to their earned income plus $450, up to the regular $16,100 for a single filer in 2026. That shelters more of their income. But the $2,700 threshold doesn’t move: the Form 8615 calculation starts from $2,700 for any child who doesn’t itemize deductions.

Does your child need to file a return?

Usually, once the account earns more than a little. A child who can be claimed as a dependent generally must file their own return when their unearned income tops $1,350, according to IRS Publication 501, the same $1,350 as the 2026 dependent standard deduction. Between $1,350 and $2,700, your child files but owes little: at most $135 on interest, and nothing on long-term gains and qualified dividends. If your child is too young to file, you file for them, signing your child’s name followed by your signature and the words “parent for minor child,” Publication 501 explains.

Who the kiddie tax applies to

Your child’s investment income over $2,700 is taxed at your rate if all of the following are true at the end of the year, according to IRS Topic 553:

• Age and support. Your child was under 18; or was 18 and didn’t have earned income of more than half their own support; or was a full-time student age 19 through 23 and didn’t have earned income of more than half their own support.
• A living parent. At least one of your child’s parents was alive.
• A filing requirement. Your child is required to file a tax return.
• No joint return. Your child isn’t filing a joint return.

A few details are easy to miss. The rule applies whether or not you claim your child as a dependent, and it covers adopted children and stepchildren, the Form 8615 instructions note. “Support” means everything spent on your child’s food, housing, clothing, education, medical care, recreation, transportation, and similar needs, whether you, your child, or anyone else paid for it, though a full-time student’s scholarship doesn’t count. And a full-time student is one enrolled full-time for part of at least five calendar months of the year, according to the IRS Instructions for Form 8814.

The upshot is that the kiddie tax can follow your child through college. A custodial account passes to your child when custodianship ends under your state’s law, as What Happens at the Age of Majority? explains. But the account’s income can still be taxed at your rate through the year your child turns 23, as long as they’re a full-time student whose earned income covers half their support or less.

What counts as unearned income

Unearned income is, broadly, income that isn’t pay for work. For the kiddie tax, it includes taxable interest, dividends, capital gains (including the capital gain distributions that mutual funds pay out), rents, royalties, and taxable scholarship and fellowship money that isn’t reported on a W-2, among other items, according to the Form 8615 instructions.

Some things don’t count:

• Pay for work. Wages from a summer job, babysitting, or mowing lawns are earned income, taxed at your child’s own rates no matter how much they make.
• Tax-exempt interest, such as interest from most municipal bonds, because it isn’t taxable income in the first place.
• Growth you haven’t cashed in. Shares that rise in value don’t create a taxable gain until they’re sold, though a fund can still pay out dividends or capital gains along the way.

It doesn’t matter where the money came from. Once investments belong to your child, all the income they produce is your child’s unearned income, no matter who gave them or when, the Form 8615 instructions note. Their own example is a 13-year-old whose dividends come from stock her grandparents gave her.

Scholarships deserve a word of warning for college families. The part of a scholarship used for room and board or other incidental expenses is taxable, according to IRS Topic 421, and when it isn’t reported on a W-2, it counts as unearned income for the kiddie tax. A student with a generous scholarship can end up owing tax at a parent’s rate.

How the kiddie tax is figured: an example

Meet Maya, who’s 10. The custodial account her grandparents helped fund produced $5,000 of investment income in 2026, and she has no job. Her parents are married, file jointly, and have $150,000 of taxable income. In 2026, that puts their next dollar of ordinary income in the 22% bracket and their long-term gains at the 15% rate, according to Rev. Proc. 2025-32. Here’s how Maya’s tax is figured:

1. Take off the tax-free slice. Maya’s $1,350 standard deduction leaves $3,650 of taxable income.
2. Find the slice taxed at her parents’ rate. Her net unearned income is $5,000 minus $2,700, or $2,300.
3. Tax the rest at Maya’s rate. The remaining $1,350 of her taxable income is taxed at her own rate.

If the $5,000 is all interest, say from a savings account or bond fund, Maya owes $506 at her parents’ 22% rate on the $2,300 and $135 at her own 10% rate on the other $1,350: $641 in all. If it’s all long-term capital gains and qualified dividends, typical of a stock index fund, the $2,300 is taxed at her parents’ 15% capital gains rate and the $1,350 at her own 0% rate: $345. The table shows how the tax grows with her income.

Assumes a child under 18 with no earned income or itemized deductions, and parents who file jointly with $150,000 of taxable income (22% ordinary bracket, 15% capital gains rate in 2026). Figured by the Form 8615 method.

The savings stop growing at $2,700

Compare Maya’s bill with what her parents would owe if the same money sat in their own account. At their rates, $5,000 of interest would cost them $1,100, and $5,000 of long-term gains would cost $750. Holding the money in Maya’s name saves $459 on interest or $405 on gains. But look at the larger rows: at $10,000 or $20,000 of income, the savings are still exactly $459 or $405, because everything above $2,700 is taxed as if her parents had earned it.

That ceiling is worth weighing against a custodial account’s trade-offs. The money legally belongs to your child, and it counts as a student asset for financial aid, assessed at up to 20% compared with 5.64% for parent assets, according to J.P. Morgan Wealth Management. Custodial Brokerage Accounts vs. Parent-Owned Taxable Accounts and How 529s and UTMAs Impact the FAFSA go deeper.

Whose rate applies?

If you’re married and file jointly, your joint return sets the rate. If you file separately, the parent with the higher taxable income does. If you’re divorced or legally separated, it’s generally the parent your child lived with for most of the year, and if that parent has remarried and files jointly with their new spouse, the couple’s joint return is used, according to the Form 8615 instructions. Parents who never married but lived together all year use the return of the parent with the higher taxable income.

More than one child

If two or more of your children owe the kiddie tax, their amounts over $2,700 are added together on top of your income before the tax is figured, then split among them in proportion, the Form 8615 instructions explain. Siblings can push each other’s income into a higher bracket, so it pays to look at the family’s total.

How big does an account have to get?

The kiddie tax is based on your child’s income, not the account’s value, and a stock index fund produces surprisingly little income. The S&P 500’s dividend yield was about 1.05% in late September 2026, according to multpl, which tracks Standard & Poor’s data. At that yield, an S&P 500 index fund would need to be worth about $257,000 before its dividends alone passed $2,700.

Most children’s accounts are nowhere near that. Saving $100 a month from birth could grow to about $42,100 by age 18 at a hypothetical 7% average annual return, and at today’s yield that balance would pay about $440 a year in dividends. So what pushes families over the line?

• Selling investments that have grown. Cashing out to pay for a car, tuition, or a gap year can realize years of gains at once, and every dollar of gain over $2,700 is taxed at your rate.
• Capital gain distributions from mutual funds. When a mutual fund sells holdings at a gain, it passes the gain to shareholders, even if you haven’t sold anything. In 2025, 41% of passive (index) mutual funds distributed a capital gain, compared with 4% of passive exchange-traded funds (ETFs), according to Morningstar data cited by State Street Investment Management.
• Interest-heavy investments. Savings accounts, CDs, and bond funds pay interest, which never gets capital gains rates. As you shift a child’s account toward bonds and cash ahead of college, as Building a Target-Date Glide Path describes, the taxable interest can add up.

Which accounts the kiddie tax touches

The kiddie tax only reaches income that’s taxed as it’s earned, so where the money sits makes all the difference.

Based on federal rules for 2026. State tax rules vary.

In a 529 plan, earnings build up without yearly tax and aren’t taxed at all when used for qualified education expenses, according to the IRS. A custodial Roth IRA works for kids with earned income: in 2026, they can contribute up to $7,500 or their taxable compensation, whichever is less, according to the IRS guide to IRA contribution limits, and earnings come out tax-free in a qualified distribution, per IRS Topic 451. Interest and dividends don’t count as compensation, so an investment account can’t fund a Roth IRA by itself.

Trump Accounts are a new type of IRA for children. Money generally can’t be withdrawn before the year the child turns 18, and after that the account is generally treated as a traditional IRA, according to IRS news release IR-2025-117. Because it’s an IRA, its earnings aren’t taxed year by year; as with a traditional IRA, they’re generally taxed only when withdrawn, Topic 451 explains.

A custodial account is the account the kiddie tax was built for: its interest, dividends, and gains are your child’s income each year. And if you keep savings for your child in your own brokerage account, the income is simply yours, taxed at your rates, with no kiddie tax to figure. The trade-off is ownership: the money stays yours, not your child’s.

How to file: Form 8615 or Form 8814

There are two ways to report a child’s investment income once it’s high enough to require a return.

Form 8615: your child’s own return

The standard route is a separate Form 1040 for your child, with Form 8615 attached whenever their unearned income is over $2,700. It works for any mix of income, including gains from selling shares, and of the two methods, it’s the only one that can tax your child’s share of long-term gains and qualified dividends at 0%. Because Form 8615 uses figures from your return, two timing rules matter. If your taxable income isn’t final by the filing deadline, your child should request an extension, too. And if your income changes after your child’s return is filed, their tax has to be refigured, according to the Form 8615 instructions.

Form 8814: reporting it on your return

Instead, you may be able to report your child’s interest and dividends on your own return with Form 8814 and skip your child’s return entirely. For 2026, your child must be under 19 (or under 24 and a full-time student), have income only from interest and dividends (including capital gain distributions), and have gross income of more than $1,350 but less than $13,500, according to Rev. Proc. 2025-32 and IRS Topic 553. There also can’t have been estimated tax payments or backup withholding in your child’s name, among other conditions.

It’s simpler, but it can cost more. Under the election, the slice between $1,350 and $2,700 is taxed at 10%, so with qualified dividends or capital gain distributions, you may pay up to $135 more than if your child filed, the Form 8814 instructions explain. The added income also raises your adjusted gross income, which can shrink credits and deductions such as the child tax credit, education credits, and the student loan interest deduction, and it counts toward the 3.8% net investment income tax for higher earners. The IRS suggests figuring the tax both ways and choosing the lower.

Ways to reduce the kiddie tax

The kiddie tax is a limit on a tax break rather than a penalty, and a little planning keeps most families under it or close to it.

Choose tax-efficient investments

Broad, low-cost stock index funds pay modest dividends, and index ETFs rarely distribute capital gains. That combination keeps yearly income low and leaves you in control of when gains are realized. Index Funds vs. Stock Picking for Minors makes the case for a simple index approach. If part of your child’s savings will sit in bonds or cash, consider holding that part in a 529 plan, where the interest isn’t taxed along the way.

Harvest gains while they’re taxed at 0%

This may be the most useful move that many families never make. Because your child’s first $1,350 of income is tax-free and the next $1,350 of long-term gains and qualified dividends is taxed at their 0% rate, a child with no other investment income can realize up to $2,700 of long-term gains a year without federal tax. Sell shares held for more than a year, then buy them right back. Your child’s cost basis resets higher, so those gains will never be taxed again. The wash-sale rule doesn’t get in the way, because it applies only to sales at a loss, as Investor.gov explains.

Here’s what that can be worth. Say Maya’s account will hold $20,000 of long-term gains by the time she sells at 17. Selling it all in one year means $17,300 taxed at her parents’ 15% rate: $2,595. If her parents instead harvest $2,000 of gains a year for the five years before, leaving room for a few hundred dollars of dividends each year, only $10,000 of gain is left at the sale. The tax drops to $1,095, a savings of $1,500, and the harvested gains cost nothing in federal tax.

Two cautions. Realizing more than $1,350 of income means your child has to file a return, even when no tax is due. And every dollar of dividends or interest uses up part of the $2,700, so check the year’s income before you sell, usually in November or December.

Use losses, too

If an investment is worth less than your child paid for it, selling realizes a loss that offsets their gains. If losses exceed gains, up to $3,000 of the difference reduces your child’s interest, dividends, and other unearned income, and the rest carries forward to future years, according to the Form 8615 instructions. To keep the loss, don’t buy the same or a substantially identical investment within 30 days before or after the sale.

Spread out big sales

Each tax year comes with its own $2,700, so a large sale split across two or more years shelters more of it. At a 15% rate, each extra year’s $2,700 is worth up to $405. When the money is needed for college, selling a portion each year, starting a year or two before the first tuition bill, usually beats one big sale. Liquidating Safely covers how to sequence withdrawals.

Timing can help, too. Once the kiddie tax no longer applies, gains are taxed at your child’s own rates, and in 2026, a single filer pays 0% on long-term gains until taxable income passes $49,450, according to Rev. Proc. 2025-32. For a young adult with modest income, that can make a later sale largely or entirely tax-free. Keep in mind that once custodianship ends, the decision is your child’s. Using Custodial Funds for Life Starts looks at those later uses.

Think twice before gifting appreciated shares

Giving your child stock that has already grown doesn’t erase the gain. A gift generally carries over the giver’s original cost basis, according to the IRS. When your child sells, the whole gain is theirs, and anything over $2,700 is taxed at your rate anyway. Gifting appreciated shares can still make sense in amounts your child can sell within the threshold. Either way, the gift counts toward the $19,000 annual gift tax exclusion for 2026, covered in The Impact of the 2026 Gift Tax Exclusion.

Put tax-advantaged accounts first

For money meant for education, a 529 plan sidesteps the kiddie tax entirely. For a teen with a paycheck, a custodial Roth IRA does the same for decades of growth, and What Qualifies as “Earned Income” for a Minor’s Roth IRA? explains which jobs count. A Trump Account can take up to $5,000 a year from family, friends, and employers combined, and its growth isn’t taxed until it’s withdrawn. That leaves a custodial account for money your child should be free to use for anything, which is where the strategies above earn their keep.

Where GoodNest fits

GoodNest lets grandparents, aunts, uncles, and friends celebrate your child’s birthdays and milestones with a contribution toward their future, often alongside a small keepsake like a book. GoodNest doesn’t hold or invest the money. Family send gifts straight to you by Zelle, Venmo, or PayPal, and you choose where they go next, which also decides how their growth is taxed.

Deposit gifts into a 529 plan or Trump Account, and the growth isn’t taxed along the way. Deposit them into a custodial account, and they become your child’s, with any income counting toward the thresholds in this guide. For most families, birthday-sized gifts won’t come close to $2,700 of investment income a year for a long time. As the account grows, and especially before any large sale, it’s worth checking where your child stands.

The bottom line

The kiddie tax sounds more alarming than it usually is. In 2026, a child’s first $1,350 of investment income is tax-free, the next $1,350 is taxed at the child’s rate, and only income above $2,700 is taxed at your marginal rate, with long-term gains and qualified dividends keeping their lower rates. Most young savers’ accounts won’t produce that much income in a year; big sales and interest-heavy holdings are what usually cross the line. Favor tax-efficient funds, harvest gains while they’re taxed at 0%, spread large sales across years, and use 529 plans, Roth IRAs, and Trump Accounts where they fit. For the rest of the plan, head back to The Ultimate Guide to Building a Generational Nest Egg for Your Child.

Frequently asked questions

What are the kiddie tax thresholds for 2026?

For 2026, the first $1,350 of a child’s unearned income is covered by the standard deduction, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed at the parents’ rate if that’s higher. These are the same amounts as in 2025. Parents can report a child’s interest and dividends on their own return with Form 8814 only if the child’s gross income is more than $1,350 and less than $13,500.

Is the kiddie tax charged at the parents’ highest tax rate?

No. Income over $2,700 is taxed at your marginal rate, the rate that would apply if that income were added on top of your own taxable income, and only if your rate is higher than your child’s. Long-term capital gains and qualified dividends keep their lower capital gains rates, so for many families, the rate on that income is 15%, not 22% or higher.

Does the kiddie tax apply to 529 plans, Roth IRAs, or Trump Accounts?

Not while the money stays inside them. Earnings in a 529 plan aren’t taxed as they grow or when used for qualified education expenses. Roth IRA earnings can come out tax-free in a qualified distribution, and Trump Account earnings are generally taxed only when withdrawn. The kiddie tax only reaches income that’s taxed each year, such as interest, dividends, and capital gains in a custodial account.

At what age does the kiddie tax stop applying?

It applies every year your child is under 18 at year-end. At 18, it still applies unless your child’s earned income is more than half of their own support. From 19 through 23, it applies only to full-time students whose earned income is no more than half of their support. Starting with the year your child turns 24, it no longer applies.

Can I report my child’s investment income on my own tax return?

Sometimes. With Form 8814, you can include your child’s interest and dividends, including capital gain distributions, on your return if your child is under 19 (or under 24 and a full-time student), had no other kind of income, and had gross income of more than $1,350 but less than $13,500 in 2026, among other conditions. It saves filing a separate return, but it can cost up to $135 more in tax and raises your adjusted gross income, which can reduce some credits and deductions. The IRS suggests figuring the tax both ways.

Sources

• Internal Revenue Service, Revenue Procedure 2025-32 (October 9, 2025), 2026 inflation-adjusted items, including the tax rate tables (section 4.01), the kiddie tax amount (4.02), capital gains rate thresholds (4.03), the standard deduction (4.14), and the gift tax annual exclusion (4.42).
• Internal Revenue Service, “IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill”, IR-2025-103 (October 9, 2025).
• Sean Lowry and Kristy N. Kamarck, Congressional Research Service, “The Kiddie Tax and Military Survivors’ Benefits”, CRS Insight IN11112 (updated January 15, 2020), via EveryCRSReport.com.
• Internal Revenue Service, “Instructions for Form 8615 (2025)”, Tax for Certain Children Who Have Unearned Income (October 22, 2025). The 2026 dollar amounts are the same, per Rev. Proc. 2025-32.
• Internal Revenue Service, Publication 501 (2025), Dependents, Standard Deduction, and Filing Information.
• Internal Revenue Service, “Topic no. 553, Tax on a child’s investment and other unearned income (kiddie tax)” (last reviewed September 24, 2026).
• Internal Revenue Service, “Instructions for Form 8814 (2025)”, Parents’ Election To Report Child’s Interest and Dividends (October 8, 2025).
• Internal Revenue Service, “Topic no. 421, Scholarships, fellowship grants, and other grants”.
• J.P. Morgan Wealth Management editorial staff, “Can a custodial account affect financial aid eligibility?” (June 30, 2026).
• multpl, “S&P 500 Dividend Yield”, based on Standard & Poor’s data (accessed September 28, 2026).
• Matthew J. Bartolini, Ronnie Kuriakose, and Matthew Polidoro, State Street Investment Management, “Tax efficiency is structural: ETFs continue to issue fewer capital gains than mutual funds” (February 18, 2026), citing Morningstar data as of December 31, 2025.
• Internal Revenue Service, “529 Plans: Questions and answers” (last reviewed January 30, 2026).
• Internal Revenue Service, “Retirement topics: IRA contribution limits”.
• Internal Revenue Service, “Topic no. 451, Individual retirement arrangements (IRAs)”.
• Internal Revenue Service, “Treasury, IRS issue guidance on Trump Accounts established under the Working Families Tax Cuts; notice announces upcoming regulations”, IR-2025-117 (December 2, 2025).
• U.S. Securities and Exchange Commission, Investor.gov, “Wash Sales” (glossary entry).
• Internal Revenue Service, “Property (basis, sale of home, etc.)”, frequently asked questions, including the basis of property received as a gift.

This article is for general educational purposes only and is not tax, investment, legal, or financial aid advice. It covers federal rules for the 2026 tax year as of the date above; state income tax rules and college aid policies vary, and tax laws and inflation-adjusted amounts can change. Tax examples are simplified: they assume a child with no earned income or itemized deductions and parents whose income stays within a single tax bracket. Growth examples are hypothetical, assume a steady 7% average annual return, and don’t reflect fees, taxes, or any specific investment. Dividend yields change daily. Investing involves risk, including possible loss of principal. GoodNest does not provide tax, legal, or investment advice and does not hold or invest funds. For your family’s situation, consider consulting a qualified tax professional.