If your child earns income from investments—like dividends, interest, or capital gains—you may need to consider how the kiddie tax could impact your family’s tax situation. Designed to prevent income shifting between generations, this rule applies when a child’s unearned income exceeds $2,600 for the 2025 tax year. While the first $1,300 is tax-free and the next $1,300 is taxed at the child’s lower rate, any income beyond that is taxed at the parent’s marginal rate, which is often much higher.

The kiddie tax applies to dependent children under 18, 18-year-olds who don’t support themselves, and full-time students ages 19 to 23 who also rely on parental support. To trigger the kiddie tax, the child must be required to file a return, must not file jointly, and at least one parent must be alive at year-end. If the rule applies, parents must file Form 8615 with the child’s tax return to calculate the appropriate tax on unearned income above the $2,600 threshold. In some cases, if investment income is high enough, the Net Investment Income Tax (NIIT) of 3.8% may also apply.

However, families may have an alternative. If a child’s total income is less than $13,000 and comes only from interest, dividends, or capital gains distributions, parents may elect to report that income on their own tax return instead of filing one for the child. This option, while convenient, may have unintended consequences—such as increasing your adjusted gross income and potentially affecting eligibility for tax credits or deductions.

Given the complexity of the kiddie tax rules, it’s important for families with young investors to plan accordingly. Whether you’re deciding how to report your child’s investment income or looking to optimize tax outcomes, understanding these guidelines can help you avoid surprises and make better-informed financial decisions. For further information, reach out to our team of tax professionals.

Link IRS – Topic no. 553, Tax on a child’s investment and other unearned income (kiddie tax)

Link IRS – Form 8615 Tax for certain children who have unearned income