Understanding the Kiddie Tax: Rules and Limits
Key takeaways
The kiddie tax may apply if your child has unearned investment income. That includes investment gains, dividends and savings account interest.
In 2025, earnings of $1,351 to $2,700 are taxed at the child’s tax rate. Anything beyond that is taxed at their parents’ tax rate.
The kiddie tax is meant to prevent parents from transferring large amounts of money to their children to secure a lower tax rate.
Matt Johnston is a senior director in Sophisticated Planning Strategies at Northwestern Mutual.
It’s never too early to teach your kids about money. Custodial investment accounts can be a great way to lay the foundation, and it could lead to a nice stream of steady income for your child. Just bear in mind that investment gains count as taxable income. So-called “kiddie tax” rules vary depending on the amount of income, but here’s a general overview of how it works. Knowing what to expect can help you and your children understand what you may owe the IRS.
What is the kiddie tax?
The kiddie tax is levied on unearned investment income received by a child. That includes capital gains, dividends and interest from savings accounts. The rule is designed to prevent parents from securing a lower tax rate by transferring large sums of money to their children. It essentially closes that loophole so that parents pay taxes on investment income at their own tax rate. (Although some of a child’s unearned investment income can be taxed at the child’s rate, it will quickly reach a point where the income will be taxed at the parents’ tax rate.)
Who has to pay the kiddie tax?
The kiddie tax applies to people with unearned investment income who are:
- Minors under the age of 18,
- Dependents between the ages of 19 and 24 who are full-time students and whose earned income is less than half of their annual expenses, or
- Children who were 18 at the end of the tax year and whose earned income was less than half of their annual expenses.
People often wonder whether kids under age 18 get taxed. If your child is under 18 at the end of the year and has investment income, a portion of that money will be taxed at their tax rate. And some of their unearned income could be taxed at your tax rate.
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How much can kids make tax-free?
Now let’s get into the kiddie tax rules. The good news is that in 2025, the first $1,350 of a child’s unearned income is tax-free—but here’s when you can expect a tax on a child’s income.
2024 tax year:
- Unearned income that exceeds $1,300 is taxed at the child’s tax rate.
- Unearned income that exceeds $2,600 is taxed at their parents’ tax rate.
2025 tax year:
- Unearned income that exceeds $1,350 is taxed at the child’s tax rate.
- Unearned income that exceeds $2,700 is taxed at their parents’ tax rate.
What types of investment accounts are subject to the kiddie tax?
To be clear, the kiddie tax applies only to unearned income like savings account interest, investment gains and dividends. This income can come from the following types of investment accounts:
- Custodial accounts like Uniform Transfers to Minors Actor (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts
- Regular brokerage accounts for adult dependent full-time students
- Inherited Traditional IRA distributions, which may come into play if you plan on leaving behind an IRA for your child (You’ll also want to familiarize yourself with inheritance tax rules.
- Unearned income distributed from trusts
If your child has a 529 college savings plan, they’ll avoid the kiddie tax since investment growth in this type of account isn’t taxed.
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Let’s get startedDoes the kiddie tax mean my child has to file their own taxes?
Your kiddo should file a tax return—probably with your supervision and guidance—if:
- Their unearned income exceeds $1,300 in 2024 or $1,350 in 2025.
- Their earned income, which they may have through a part-time job, exceeds the standard deduction amount for the year. That’s $14,600 in 2024 or $15,000 in 2025.
Depending on how the numbers work out, your child could have a tax refund coming their way.
Do parents have to report their children’s income?
It depends on the situation. If your child is submitting their own tax return, you can help them complete IRS Form 8615 and attach it to their 1040 tax return form. In some cases, you might be able to include your child’s income with your own and report the total when filing your own tax return. This requires IRS Form 8814. It’s best to consult a tax professional to help you decide which option is right for you. They can also help you find which tax deductions and credits to claim.
Understanding your taxes might feel overwhelming enough. Trying to navigate the tax rules for a child only complicates things further. Your Northwestern Mutual financial advisor can be a powerful resource, connecting you with the right resources for your situation. Together, you and your advisor can create a financial plan that’s designed to minimize the impact of taxes while helping to grow and protect your money.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.
