The definition, precisely
IRC §1(g) taxes a child's unearned income above an indexed threshold at the parents' marginal rate: the first slice is sheltered by the child's standard deduction for unearned income, the next slice is taxed at the child's own rate, and everything beyond is parental-rate income reported on Form 8615 (or, if eligible, directly on the parents' return via Form 8814). It covers children under 18, non-self-supporting 18-year-olds, and non-self-supporting full-time students 19 through 23. Earned income — the teenager's actual paycheck — is never kiddie-tax income.
How the kiddie tax actually works
The mechanics punish the obvious dodge: transferring dividend stocks to a UTMA account moves the income to the child's return but keeps the parents' rate on every dollar above the threshold slices. The legal sidesteps change the vehicle instead of the owner — 529 growth never appears on the child's return, Roth IRA growth (funded from the child's real earnings) is exempt, and Series I savings bonds can exclude interest used for education. Timing matters too: realizing custodial gains after the child ages out restores the child's own (usually lower) rates.
The fine print
Two traps catch careful parents. Form 8814 (reporting the child's income on your return) looks convenient but inflates your AGI — phasing credits, Medicare premiums, and NIIT exposure — where a separate Form 8615 would not. And UTMA assets belong to the child irrevocably at majority: the kiddie tax ends at 18 or 24, but so does your control of the money. Fund the 529 you control before the custodial account you don't.
Frequently Asked Questions
- The first slice of unearned income — an indexed threshold, roughly $2,700 — is covered by the child's standard deduction for unearned income; the next equal slice is taxed at the child's rate. Everything above both slices is taxed at the parents' marginal rate.
- Children under 18 always; 18-year-olds unless self-supporting; full-time students ages 19–23 unless self-supporting. Support test included: a self-supporting 20-year-old with a job escapes it even while studying.
- No — wages from the child's own job are taxed at the child's rates, and can even fund the child's Roth IRA. The kiddie tax touches unearned income only: interest, dividends, capital gains, rents, royalties.
- Fund 529s (growth never hits the child's return), fund the child's Roth from real earnings, hold growth assets for the child's adulthood, and keep custodial-account income under the threshold slices. Shifting the asset works; shifting the income doesn't.