How Much Investment Income Can My Child Earn Before the Kiddie Tax Kicks In at My Tax Rate?

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A child can have investment income without automatically paying tax at a parent’s rate, but the line arrives sooner than many families expect. For 2026, a child generally can have up to $2,700 of unearned income before the Kiddie Tax begins applying to income above that amount. Understanding what counts toward the threshold, and which children are covered, can help families make better investment and tax-planning decisions.

What the Kiddie Tax Is and Which Children It Applies To

The Kiddie Tax was created to limit families’ ability to reduce taxes by transferring income-producing assets to children who are in lower tax brackets. For 2026, the Kiddie Tax rules generally apply to children under age 18, age 18 if their earned income does not exceed half of their support, and full-time students ages 19 through 23 who do not provide more than half of their support from earned income. At least one parent also must be living, and the child generally cannot file a joint return. Earned income from actually working is not subject to these rules.

How Much Unearned Income a Child Can Earn Before the Kiddie Tax Kicks In

For 2026, the key number is $2,700. The first $1,350 of a dependent child’s unearned income generally is sheltered by the dependent standard deduction. The next $1,350 generally is taxed at the child’s tax rate. Once unearned income exceeds $2,700, the excess may be taxed using the parent’s tax rates.

That does not necessarily mean the excess is taxed at the parent’s highest marginal rate. The result depends on the parent’s taxable income and the type of investment income involved. Long-term capital gains and qualified dividends may receive preferential rates, while interest and short-term capital gains can be taxed as ordinary income.

What Counts as Unearned Income for Kiddie Tax Purposes

For unearned income tax purposes, the category is broader than just bank interest. It generally includes taxable interest, dividends, capital gains and capital gain distributions, rents, royalties, certain pension and annuity income, unemployment compensation, taxable Social Security benefits and certain taxable distributions received from a trust.

Income earned for work actually performed is different. Wages, salaries, tips and compensation for personal services generally are earned income and therefore are not subject to the Kiddie Tax. This distinction can become important when a teenager has both a summer job and a sizable custodial investment account, because the two types of income receive very different tax treatment.

How the Kiddie Tax Is Calculated and Reported on Form 8615

A child who meets the applicable requirements and has more than $2,700 of unearned income generally uses Form 8615 with the child’s Form 1040 to calculate the tax. The form determines the child’s net unearned income and then calculates the tax using information from the parent’s return. The parent’s taxable income, filing status and applicable rates can therefore affect the child’s tax liability.

Because the kiddie tax calculation relies on information from both the child’s and parent’s returns, families should retain records supporting the reported income and tax calculation. These records can also help address statute of limitation tax issues if questions about a return arise later. Keeping clear records is particularly important when a child’s investment or business interests involve more specialized tax rules, such as those that may apply to a profits interest.

How Families Can Plan Around the Kiddie Tax Legally

Planning often starts with reviewing what investments are held in a child’s name and how much taxable income those investments generate. Growth-oriented investments that generate relatively little current interest or dividends may defer taxable income until the child is no longer subject to the Kiddie Tax. Families saving for education also may compare custodial accounts with tax-advantaged options such as 529 plans, where qualified education withdrawals can be federally tax-free.

If the child has legitimate earned income, contributing to a Roth IRA may provide a retirement-planning opportunity, subject to applicable contribution and income limits. Families should also consider whether an available tax election, such as the Form 8814 election to report certain of a child’s interest, dividends and capital gain distributions on the parent’s return, is appropriate.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Personal Financial Services practice, or call us at 770.396.2200.

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