# Understanding Kiddie Tax: Rules and Rates

![Kiddie Tax: A tax imposed on income unrelated to employment received by individuals 18 years of age or under or dependent full-time students younger than 24.](https://www.investopedia.com/thmb/_5kCPJFJAvQgaAkjAzV_FUTz49o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Kiddietax_final-c257b8a4bb4f49e38dfa6967e6df81a0.png)

*— Investopedia / Michela Buttignol*

## What Is the Kiddie Tax?

The kiddie tax, introduced with the [Tax Reform Act of 1986](https://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986), targets unearned [income](https://www.investopedia.com/terms/u/unearnedincome.asp) of minors and young adults to prevent families from evading taxes by shifting investment income to children.

This tax applies to [unearned income](https://www.investopedia.com/terms/u/unearnedincome.asp) above a certain limit for children under 18 and dependent full-time students under 24. Income below this limit is taxed at the child's tax rate, while income above that limit is taxed at the guardian's tax rate, potentially up to 37%. The exact threshold is adjusted every year to keep up with inflation.

### Key Takeaways

*   The kiddie tax applies to unearned income for individuals 18 or younger, and full-time students up to 24, ensuring parents do not exploit a tax loophole by shifting investments to their children.
*    Unearned income below a certain limit is taxed at the child's rate, while income exceeding that threshold is taxed at the parent's potentially higher tax rate, which can reach up to 37%.
*   The kiddie tax encompasses unearned income types like dividends, interest, and capital gains but does not include a child's employment income.
*   This tax was initially introduced in 1986 to prevent parents from using their children's lower tax rates, and a 2020 law reinstated using the parent's tax rate after a temporary change in 2017.
*   Careful investment strategies can help avoid the kiddie tax by keeping a child's annual unearned income at or below the threshold.

## Understanding the Mechanics of the Kiddie Tax

The kiddie tax targets individuals below a certain age with investment and unearned income exceeding a set yearly threshold. It applies to all children aged 18 and under at the end of the tax year as well as children who are dependent [full-time students](https://www.investopedia.com/terms/f/fulltimestudent.asp) between the ages of 19 and 24.

> **Important**
>
> The kiddie tax does not apply to children under 24 years of age who are married and file joint tax returns.

This rule is designed to prevent parents from exploiting a [tax loophole](https://www.investopedia.com/terms/l/loophole.asp) where their children are given large gifts of stock. In this case, the child would then [realize any gains](https://www.investopedia.com/terms/r/realizedprofit.asp) from the investments and would be taxed at a far lower rate compared to the rate the guardians face for their realized stock gains.

The kiddie tax covers unearned income like interest, dividends, capital gains, rent, and royalties but does not apply to salary or wages a child earns.  

> **Tip**
>
> Adult children who turn 19—or 25 in the case of dependent full-time students—by the end of the tax year are not subject to the kiddie tax. 

## What Is the Kiddie Tax Rate?

Under the kiddie tax law, all unearned income over the threshold is taxed at the guardian's marginal income [tax rate](https://www.investopedia.com/terms/t/taxrate.asp) rather than the child's tax rate.

The first portion of a child's unearned income qualifies for the [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp). After that, the next portion is taxed at the child's tax rate, which is very low—sometimes 0%—and anything above the kiddie tax threshold is taxed at the guardian's tax rate, which could be as high as 37%.

> **Warning**
>
> The IRS taxes income exceeding the threshold at the parent's tax rate.

## Reporting Kiddie Tax: What You Need to Know

There are generally two ways to go about reporting a child’s unearned income.

1.  The parent reports a child's interest, ordinary dividends, and capital gains distributions alongside their own tax return on [Form 8814](https://www.irs.gov/forms-pubs/about-form-8814) (Parent’s Election to Report Child’s Interest and Dividends)
2.  The child reports it on [Form 8615](https://www.irs.gov/forms-pubs/about-form-8615) (Tax for Certain Children Who Have Unearned Income), which is attached to the child’s [Form 1040](https://www.irs.gov/forms-pubs/about-form-1040)

The first option can be used when the child’s only income is interest and dividend income, including capital gains, and totals less than $11,000. If that’s not the case, the second route will have to be taken, presumably with the help of the parent.

## The Evolution of the Kiddie Tax: A Historical Overview

Initially, the tax law applied only to children under 14, who typically earned income from [dividends](https://www.investopedia.com/terms/d/dividend.asp) or interest since they couldn't legally work. Tax authorities noticed that some guardians exploited the system by [gifting stocks](https://www.investopedia.com/ask/answers/07/giftofstock.asp) to their older children aged 16 to 18.

The [Tax Cuts and Jobs Act of 2017](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) temporarily changed the kiddie tax to use the tax rates that apply to estates and trusts rather than the tax rate of the child's parents. However, the Further Consolidated Appropriations Act 2020 retroactively changed it back to the parent's tax rate. For 2018 and 2019 returns, taxpayers could use either the estate tax rates or the parent's take rate for calculating the kiddie tax. For 2020 and beyond, the parent's tax rate applies.

## Who Is Subject to Kiddie Tax?

The kiddie tax is imposed on individuals under 18 years old or dependent full-time students under 24 years old whose investment and unearned income is higher than an annually determined threshold.

## What Is the Purpose of the Kiddie Tax?

The kiddie tax was created under the Tax Reform Act of 1986 to stop parents from registering income-producing investments in their children’s name to pay fewer taxes. Income received from investments is generally taxed at ordinary income tax rates, which is based on how much an individual earns.

## How Do I Avoid Kiddie Tax?

Parents or grandparents can avoid the kiddie tax by keeping the child’s annual investment income below the threshold for the kiddie tax. This can be accomplished in a number of ways, including investing in assets that don’t pay much in the way of income or dividends or in bonds where the payment of interest can be deferred until the child is no longer subject to the kiddie tax.

## The Bottom Line

The kiddie tax, a tax imposed on individuals under a certain age whose unearned income is higher than an annually determined threshold, is designed to put an end to an old tax loophole and is something parents need to be aware of.

If you are investing on behalf of a child, consider speaking to a financial advisor or tax advisor. Firstly, it’s important to be aware of the rules and your obligations. And secondly, there are ways to limit and/or avoid this liability.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Rev. Proc. 2022-38](https://www.irs.gov/pub/irs-drop/rp-22-38.pdf)."
>     
> 2.  Internal Revenue Service. "[Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)](https://www.irs.gov/taxtopics/tc553)."
>     
> 3.  United States Senate Committee on Finance. "[The Real Effect of the 'Kiddie Tax' Change](https://www.finance.senate.gov/chairmans-news/the-real-effect-of-the-kiddie-tax-change)."
>     
> 4.  U.S. Congress. "[H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018](https://www.congress.gov/bill/115th-congress/house-bill/1/text)."
>     
> 5.  U.S. Congress. "[H.R.1865 - Further Consolidated Appropriations Act, 2020](https://www.congress.gov/bill/116th-congress/house-bill/1865/text)."