What is Kiddie Tax?

The kiddie tax is a special tax rule that applies to unearned income of children under 19, or full-time students under 24. Established by the Tax Reform Act of 1986, this rule prevents parents from reducing their tax burden by transferring income-generating assets to their children who are typically in lower tax brackets.

Key Points

Applies to unearned income over $2,300 (as of 2024)
Affects children under 19 or full-time students under 24
Covers income from investments, dividends, and capital gains

Who Must Pay Kiddie Tax?

Your child may be subject to kiddie tax if they:

Are under 19 years old at the end of the tax year
Are a full-time student under 24 years old at the end of the tax year
Have unearned income exceeding $2,300 (2024 threshold)
Have at least one living parent at the end of the tax year
Don't file a joint return for the tax year

Kiddie Tax Calculator

2024 Tax Brackets and Rates

Unearned Income	Tax Rate	Calculation Method
First $1,150	Child's tax rate (usually 10%)	Standard tax calculation
Above $1,150	Parent's tax rate	Parent's marginal rate applies

Real-World Examples

Example 1: Basic Scenario

Situation: A 16-year-old has $3,000 in dividend income from inherited stocks.

Unearned income: $3,000
Exceeds threshold by: $700 ($3,000 - $2,300)
First $1,150: Taxed at child's rate (10%)
Remainder: No additional tax in this case

Example 2: Complex Scenario

Situation: A 20-year-old student has $5,000 in capital gains and $1,500 in earned income.

Unearned income: $5,000
Earned income: $1,500
Exceeds threshold by: $2,700 ($5,000 - $2,300)
First $1,150 of excess: Child's rate (10%)
Remaining $1,550: Parent's rate applies

Frequently Asked Questions

What income is subject to kiddie tax?

Kiddie tax applies to unearned income such as:

Interest
Dividends
Capital gains
Rents
Royalties
Social security benefits

How can I minimize kiddie tax?

Several strategies can help minimize kiddie tax:

Invest in tax-free municipal bonds
Use 529 college savings plans
Gift appreciated assets to adult children
Time the recognition of capital gains

Are there any exemptions to kiddie tax?

Yes, kiddie tax doesn't apply if:

The child is married filing jointly
Unearned income is $2,300 or less (2024)
Neither parent is living at the end of the tax year