When families begin investing or saving for a child’s future, they may hear the term kiddie tax. Despite the name, it’s not actually a separate tax. Instead, it refers to rules designed to prevent parents from shifting investment income into a child’s name simply to take advantage of a lower tax rate.
Understanding how the kiddie tax works can help families make smarter decisions when managing investments for children.
The kiddie tax was created to discourage income shifting. Without these rules, parents could transfer investments into a child’s account and have the income taxed at the child’s typically lower tax rate.
Instead, the rules place limits on how much investment income a child can receive before higher tax rates apply.
For the 2025 tax year, a child’s unearned income; such as interest, dividends, or capital gains—is taxed using the following structure:
These thresholds are adjusted periodically, so the exact amounts may change from year to year.
With careful planning, families may be able to take advantage of these thresholds. For example, a parent may choose to transfer certain assets into a child’s account so that some investment income is taxed at the child’s lower rate.
However, it’s important to keep gift tax rules in mind. Generally, parents can give each child up to $19,000 per year without needing to file a gift tax return. Like other tax thresholds, the annual exclusion amount may change over time.
If a child holds investments, families may consider managing them in a way that keeps annual income close to the $2,700 threshold.
For instance, if dividend income is expected to fall short of that level in a given year, selling a stock with gains could potentially help use the available lower tax brackets.
Of course, every investment decision should be evaluated carefully, considering both tax implications and long-term financial goals.
It’s also important to report a child’s income correctly on tax returns.
In some cases, parents may elect to include a child’s unearned income on their own tax return. However, doing so generally means losing the benefit of the child’s lower tax rate.
Because the rules can be complex, working with a tax professional can help ensure that income is reported correctly and that families take advantage of any available tax-saving opportunities.
The kiddie tax rules are designed to prevent income shifting, but they can still allow families to take advantage of limited tax savings when used thoughtfully. Understanding the thresholds, gift rules, and reporting options can help parents make informed decisions when investing on behalf of their children.
If you have questions about the kiddie tax or managing investments for your family, speaking with a trusted tax advisor can help you navigate the rules and plan effectively for the future.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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