Carrying a (modest) tax burden.© koosen/stock.adobe.com, © briagin/stock.adobe.com; Photo illustration Encyclopædia Britannica, IncBefore the Tax Reform Act of 1986, parents who had some good tax-planning advice were able to put investments in a child’s name so that any investment income would be taxed at the child’s tax rate, which is typically lower than the parents’ marginal tax rate.

　　That loophole was closed with the introduction of IRS Topic No. 553, “Tax on a child’s investment and other unearned income tax,” known as the kiddie tax. The kiddie tax applies to certain types of unearned income (e.g., interest, dividends, and capital gains). If those earnings are above a set threshold ($2,600 in 2025), they’re taxed at the parents’ marginal tax rate rather than at the child’s tax rate—even if the investment is in the child’s name.

　　Types of income included in the kiddie taxEarned income like wages, salaries, tips, and pay for work are not subject to the kiddie tax. Instead, they’re subject to the child’s own tax rate. 

　　InterestDividends Capital gains (including capital gains distributions) Rental income Royalties Pension and annuity income Taxable scholarship and fellowship grants not reported on Form W-2 Unemployment compensation Alimony Unearned income from a trust Taxable portions of Social Security and pension payments to the childHow do you report the kiddie tax?The IRS states that when all of the following conditions are met, Form 8615 must be filed with a child’s tax return:

　　The child is required to file a tax return for the tax year. The child has more than $2,600 of unearned income. At least one of the child’s parents was alive at the end of the tax year. The age requirements are met:The child was under age 18 at the end of the tax year. The child was 18 at the end of the tax year but didn’t receive enough wages to pay for at least half of their living expenses (food, lodging, clothing, education, medical care, etc.). The child was a full-time student between the ages of 19 and 24 and didn’t receive enough wages to pay for at least half of their living expenses.Calculating the kiddie taxForm 8615 calculates the kiddie tax. For 2024, the first $1,300 of a child’s unearned income is tax free; the next $1,300 is subject to the child’s own tax rate. Unearned income over $2,600 ($1,300 plus $1,300) is pulled out of the child’s income and taxed at the parents’ rate, then added to the tax calculated on the rest of the child’s income at their own rate.

　　Example of a kiddie tax calculationSuppose that Xavier, age 15, who is claimed as a dependent on his parents’ tax return, earned the following income in 2024.

　　Dividends: $1,800Taxable interest: $1,000 Tax-exempt interest: $200 Capital gains: $120 Capital losses: ($80) Wages: $2,000Xavier’s unearned income is ($1,800 + $1,000 + $120 – $80) =  $2,840 and his earned income—the amount he earned in wages—is $2,000, making his total income $4,840. (Note that tax-exempt interest is just that—not subject to tax.) 

　　The next step is to determine how much of Xavier’s unearned income is subject to the kiddie tax. For 2024, the first $2,600 of a child’s unearned income is not subject to the parents’ tax rate. Xavier had $2,840 in unearned income. Subtract the $2,600 threshold: ($2,840 – $2,600) = $240. Form 8615 will need to be filed along with his tax form, and it calculates the tax on that $240 using his parents’ marginal tax rate.

　　The third step is to calculate Xavier’s standard deduction. For the 2024 tax year, the standard deduction amount for anyone who’s claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,300, or (2) the sum of $450 and the individual’s earned income.

　　Because Xavier is listed as a dependent on his parents’ return, his standard deduction would be the $2,000 in wages plus $450, or $2,450.  

　　The fourth step—calculating the taxable income—would be to subtract his standard deduction, as well as the amount of unearned income already taxed at his parents’ rate, from his total income. Xavier’s taxable income would be ($4,840 – $2,450 – $240) =  $2,150.

　　Finally, the form will use the tax tables to calculate the tax on Xavier’s taxable income and add it to the tax calculated on the $240 at his parents’ rate. 

　　It’s a confusing, multilayered calculation (as are most elements of the tax code), but the good news is that modern tax preparation software and websites will automatically make the calculations for you—and fill out Form 8615 if needed.

　　Can you report your child’s income as your own?Under certain conditions, you can elect to report your child’s interest and dividends on your own tax return using Form 8814, “Parents’ election to report child’s interest and dividends.” If you make this election, your child doesn’t need to file Form 8615 separately. However, you might pay more tax. For the 2024 tax year, the following conditions must apply:

　　Your child was under age 19 (or a full-time student under age 24).Your child’s only income was from interest, dividends, and capital gain distributions. Your child’s gross income was less than $13,000. Your child was required to file a return, but not be a joint return. There was no federal income tax withheld from the child’s income, nor estimated tax payments made. You qualify to make the election depending on both parents’ tax filing status.The bottom linePutting investments in your child’s name won’t give you a tax break anymore. The kiddie tax rules were designed to prevent that. Accounts set up under the Uniform Gifts to Minors Act (UGMA) let you transfer assets to a custodial account for your child, but any investment income from that account may be taxed at your rate—not theirs—if it exceeds the kiddie tax thresholds. You won’t owe gift tax unless you give more than $18,000 in 2024 (or $36,000 if you and your spouse give jointly).

　　It’s great for children to have their own savings, but if the money is earmarked for college, consider using a 529 plan instead. A 529 grows tax free and avoids kiddie tax complications altogether.

　　ReferencesIRS Topic No. 553IRS Topic No. 553 | irs.govInstructions for Form 8615 | irs.gov Instructions for Form 8814 | irs.gov