What Are the Kiddie Tax Rules for Children's Unearned Income?

Children with investment income don’t always get taxed at their own low rates. Since 1986, IRC 1(g) has required that a child’s unearned income above a threshold be taxed at the parent’s marginal rate, not the child’s. The rule is commonly called the “kiddie tax,” and it exists to prevent parents from shifting investment income into their children’s names to take advantage of lower brackets. For families that live entirely in the US, the kiddie tax is a straightforward (if unwelcome) calculation on Form 8615. For cross-border families, particularly Canadian families with a US-citizen child, the kiddie tax intersects with Canadian attribution rules, foreign account reporting, and the child’s independent US filing obligation in ways that most preparers don’t anticipate.

What is the kiddie tax?

The kiddie tax is a provision under IRC 1(g) that taxes a child’s unearned income above a specified threshold at the parent’s marginal tax rate rather than the child’s own rate.

Congress enacted it in 1986 as part of the Tax Reform Act. Before that, parents could shift large amounts of investment income to their children by transferring assets into the child’s name. The child would report the income on their own return at the lowest brackets. The kiddie tax closed that strategy by applying the parent’s rate to the child’s investment income above the threshold.

The Tax Cuts and Jobs Act of 2017 briefly switched the kiddie tax to use trust and estate tax brackets instead of the parent’s rate. That change (2018-2019) was widely criticized because it increased the tax for Gold Star families receiving survivor benefits. The SECURE Act of 2019 repealed it retroactively, and since 2020 the kiddie tax has reverted to using the parent’s marginal rate.

Which children does the kiddie tax cover?

The kiddie tax applies to children who are under 19 at the end of the tax year, or under 24 if they’re full-time students, provided their earned income doesn’t exceed half of their own support.

Specifically, IRC 1(g)(2) defines the children subject to the kiddie tax as those who meet all of these conditions:

• The child has more than $2,600 in unearned income for the tax year (2025 threshold).
• The child is required to file a tax return.
• The child doesn’t file a joint return.
• At least one parent is alive at the end of the tax year.
• The child falls into one of three age groups: under 18 at the end of the tax year; exactly 18 at year-end with earned income that doesn’t exceed half of the child’s support; or 19 through 23 at year-end, a full-time student, with earned income that doesn’t exceed half of the child’s support.

The “earned income doesn’t exceed half of support” test is what catches older children. An 18-year-old who earns $8,000 from a summer job but whose parents pay $40,000 for housing and tuition is still subject to the kiddie tax, because $8,000 is less than half of the total support. Once a child turns 19 (or 24 if a full-time student) or earns more than half their own support, the kiddie tax no longer applies.

How are the income thresholds calculated?

For 2025, the first $1,300 of a child’s unearned income is sheltered by the child’s standard deduction and is tax-free. The next $1,300 (from $1,301 to $2,600) is taxed at the child’s own rate, which is typically 10%.

Everything above $2,600 is the child’s “net unearned income” under IRC 1(g)(4), and that amount is taxed at the parent’s marginal rate. These thresholds are indexed for inflation and adjusted annually by the IRS.

The calculation works like this: take the child’s total unearned income, subtract $2,600, and the remainder is stacked on top of the parent’s taxable income to determine the marginal rate. The child doesn’t actually file with the parent. Form 8615 calculates what the parent’s tax would be if the child’s net unearned income were added to the parent’s income. The tax at that marginal rate is then reported on the child’s own return.

If multiple children are subject to the kiddie tax, all of their net unearned income is combined and stacked on the parent’s income. The resulting tax is allocated proportionally based on each child’s share.

What counts as unearned income?

Unearned income for kiddie tax purposes includes interest, ordinary dividends, qualified dividends, capital gains (both short-term and long-term), rents, royalties, and taxable trust distributions. It’s essentially any income that isn’t compensation for services the child actually performed.

Earned income (wages, salary, self-employment income from a business the child operates) isn’t subject to the kiddie tax and is always taxed at the child’s own rates. The distinction matters because a child who earns $10,000 from a summer job and receives $3,000 in dividends from a custodial account pays kiddie tax only on the portion of the $3,000 that exceeds $2,600, not on any of the earned income.

A few items that sometimes cause confusion:

Taxable scholarships are treated as earned income for purposes of the kiddie tax, not as unearned income. A child who receives a scholarship that exceeds qualified education expenses doesn’t owe kiddie tax on the excess.

Social Security survivor benefits paid to a child are treated as unearned income for kiddie tax purposes. This was the specific issue that made the 2018-2019 estate-rate version of the kiddie tax so punitive for Gold Star families.

Capital gain distributions from mutual funds count as unearned income even if the child didn’t sell anything. The fund’s internal transactions generate the distribution, and it flows through to the child’s return.

Trust distributions. When a child receives a distribution from a trust that carries out distributable net income (DNI), the taxable portion of that distribution is unearned income. For cross-border families with a Canadian family trust, distributions to a US-citizen beneficiary child are reportable on the child’s US return and subject to the kiddie tax.

How does Form 8615 work?

Form 8615 calculates the tax on a child’s net unearned income at the parent’s marginal rate. The child files the form with their own Form 1040, and it’s required whenever the kiddie tax applies.

The form is attached to the child’s return, not the parent’s. The child reports all income on their own 1040, then uses Form 8615 to compute the additional tax. The calculation requires the parent’s taxable income and filing status, so the child’s preparer needs information from the parent’s return.

The form’s key lines: Line 1 captures the child’s net unearned income (total unearned income minus $2,600). Lines 5 through 9 enter the parent’s taxable income and the parent’s tax. Lines 10 through 13 compute the tax on the parent’s income plus the child’s net unearned income combined; the difference is the kiddie tax, allocated to the child. Line 18 is the child’s total tax: the kiddie tax on net unearned income plus the regular tax on everything else.

If multiple children in the family are subject to the kiddie tax, each child files their own Form 8615. The combined net unearned income of all children is used, and the resulting tax is split proportionally.

Can parents report it on their own return?

Yes, but only in limited circumstances. Form 8814 lets parents include a child’s interest and dividends (not capital gains from sales) on the parent’s own return, avoiding the need for the child to file a separate return.

The election is available only if the child’s income consists solely of interest and dividends (including capital gain distributions from mutual funds) and the total is between $1,300 and $13,000 for 2025. If the child has any capital gains from actual sales, any earned income, or total income above $13,000, Form 8814 can’t be used, and the child must file their own return with Form 8615.

The election has a significant downside: the first $1,300 of the child’s income, which would be tax-free on the child’s own return, is instead taxed at the parent’s rate. When the child files separately with Form 8615, the first $1,300 is sheltered by the child’s standard deduction. With Form 8814, that shelter disappears.

It’s a convenience trade-off: you save the cost of preparing a separate return, but you pay more tax. For children with $5,000 or more in unearned income, filing a separate return with Form 8615 almost always saves money.

How do UTMA and UGMA accounts interact?

UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) custodial accounts are the most common vehicles parents use to invest in a child’s name, and they’re the primary trigger for the kiddie tax.

When a parent, grandparent, or anyone else contributes to a UTMA or UGMA account, the contribution is an irrevocable gift to the child. The assets belong to the child legally, and the income they generate is the child’s income. That income is reported on the child’s return and is subject to the kiddie tax if it exceeds $2,600.

The irrevocability is what makes these accounts different from a parent’s own investment account. The parent can’t take the money back. The custodian manages the account until the child reaches the age of majority (18 or 21, depending on the state), at which point the child takes full control.

For gift tax purposes, contributions to a UTMA or UGMA account are present-interest gifts that qualify for the annual gift tax exclusion ($19,000 per donor per recipient in 2025). Parents can fund a custodial account up to $19,000 per year without filing a gift tax return. Amounts above that require Form 709 but typically don’t produce actual gift tax unless the parent has exceeded their lifetime exemption.

The planning tension is real: UTMA and UGMA accounts provide no income-shifting benefit once the kiddie tax kicks in. Income above $2,600 is taxed at the parent’s rate anyway, so the only tax advantage is the $2,600 sheltered at lower rates. For families weighing a custodial account versus a 529 plan, the kiddie tax is usually the deciding factor.

What if the child is a US citizen in Canada?

This is where the kiddie tax collides with cross-border tax. A child born in the US is a US citizen regardless of where the family lives, and US citizens are taxed on worldwide income. A US-citizen child living in Canada with Canadian parents has a US filing obligation on all income, including earnings from Canadian accounts.

The child’s US filing threshold is low: for 2025, a dependent child with unearned income above $1,300 must file a US return. That means a Canadian ITF (in-trust-for) account generating more than $1,300 in interest or dividends triggers a US filing obligation for the child, and if the unearned income exceeds $2,600, the kiddie tax applies on top of it.

Several Canadian account types create specific issues:

ITF (in-trust-for) accounts. These are informal trust accounts that Canadian parents commonly open at banks or brokerages for their children. The income from an ITF account is the child’s income for US purposes and is subject to the kiddie tax. On the Canadian side, attribution rules (discussed below) may attribute the income back to the parent, creating a mismatch in who reports the income in each country.

RESP distributions. The subscriber (usually the parent) contributes, but when the child receives an Educational Assistance Payment (EAP) from the RESP, the EAP is taxable income to the child in Canada. For US purposes, the portion that represents investment growth (not the return of contributions) is unearned income subject to the kiddie tax. The Canada Education Savings Grant (CESG) component is also taxable to the child on both sides.

TFSA and RRSP. Neither is available to minors. You must be 18 to open a TFSA, and RRSPs require earned income to generate contribution room. These vehicles aren’t relevant to the kiddie tax for children, but they become relevant as planning tools once the child reaches adulthood.

FBAR and Form 8938. If the child’s Canadian financial accounts exceed $10,000 in aggregate value at any point during the year, the child must file an FBAR (FinCEN 114). If specified foreign financial assets exceed $50,000 at year-end, Form 8938 is also required. A Canadian ITF account can trigger both.

For families who’ve never filed US returns for a US-citizen child, the Streamlined Filing Compliance Procedures may be available: three years of delinquent returns and six years of FBARs, certifying non-willful failure. This is the standard catch-up path for US citizens abroad who haven’t filed.

How do Canadian attribution rules compare?

Canada doesn’t have a kiddie tax. Instead, it uses attribution rules under ITA 74.1 and ITA 74.2 that attribute certain income and capital gains back to the person who transferred property to a related minor or spouse. The approach is different, but the policy goal is the same: prevent income splitting.

Here’s how the Canadian rules work:

Income attribution (ITA 74.1). When a parent transfers or loans property to a child under 18, the income earned on that property (interest, dividends, rental income) is attributed back to the transferor and taxed on the transferor’s return. This continues until the child turns 18. Note that this applies to “income” but not to capital gains on property transferred to minors, which is a key difference from the US kiddie tax.

Capital gains attribution (ITA 74.2). Capital gains attribution applies to transfers to a spouse or common-law partner, not to transfers to minor children. If a parent transfers property to a child under 18 and the child later realizes a capital gain on it, the gain is taxed in the child’s hands, not attributed back to the parent. This creates an asymmetry with the US kiddie tax, which does tax the child’s capital gains at the parent’s rate.

Second-generation income. Attribution applies to income on the transferred property, but not to income earned on that income. If a parent gives a child $10,000, the interest on that $10,000 is attributed back to the parent. But if the child reinvests the interest and earns more interest on it, the second-generation interest belongs to the child. Over time, the non-attributed portion grows.

Prescribed-rate loans (ITA 74.5). A parent can lend money to a family trust or directly to a child at the CRA’s prescribed interest rate, and as long as the interest is actually paid by January 30 of the following year, the attribution rules don’t apply under ITA 74.5(2). The prescribed rate fluctuates with market rates. This is a legitimate income-splitting strategy on the Canadian side, but it doesn’t change the US kiddie tax analysis: the investment income is still the child’s unearned income for US purposes.

The cross-border mismatch is significant. A parent who transfers investments to a child in Canada has the income attributed back to them for Canadian tax purposes (ITA 74.1), but the same income is taxed on the child’s US return at the parent’s rate (kiddie tax). The income is taxed at the parent’s rate in both countries, but on different returns. The foreign tax credit coordination requires tracking which person claimed the income where, because the child’s US return needs to credit the Canadian tax that may have been paid by the parent.

What planning strategies reduce the tax?

The kiddie tax can’t be eliminated entirely, but it can be managed. The goal is to reduce the amount of unearned income subject to the tax or to take advantage of the thresholds and rate differentials that remain.

Earned income for the child. If the child has legitimate earned income (from a job, a family business, or self-employment), the earned income is taxed at the child’s own rates. More importantly, if the child’s earned income exceeds half of their support, the kiddie tax stops applying entirely at age 18 (or 24 for students). Hiring a child in a legitimate family business at a reasonable wage can accelerate the exit from the kiddie tax.

Roth IRA for minors with earned income. A child with earned income can contribute to a Roth IRA (up to the lesser of their earned income or $7,000 for 2025). This doesn’t reduce the kiddie tax directly, but it shelters future investment growth from all income tax. A 15-year-old who earns $5,000 and contributes it to a Roth starts decades of tax-free compounding.

Tax-exempt bonds. Interest from municipal bonds is exempt from federal income tax. If the child holds municipal bonds or a muni bond fund in a custodial account, the interest doesn’t count as unearned income for kiddie tax purposes. The trade-off is lower pre-tax yields.

Growth stocks over dividend stocks. Unrealized capital gains aren’t income. A custodial account invested in growth stocks that don’t pay dividends generates no current unearned income. The kiddie tax only applies to income that’s actually realized, so deferring gains until after the child ages out of the kiddie tax (age 19, or 24 for students) avoids the tax entirely.

Timing of capital gains harvesting. If the child is going to age out of the kiddie tax next year (turning 19, or turning 24 and graduating), deferring realization of capital gains until the following year means those gains will be taxed at the child’s own rate rather than the parent’s.

529 plans instead of UTMA/UGMA. Contributions to a 529 education savings plan grow tax-free and distributions for qualified education expenses are tax-free. Unlike a UTMA/UGMA account, a 529 doesn’t generate current unearned income subject to the kiddie tax. The trade-off is that the money must be used for education expenses (with some flexibility for Roth IRA rollovers under the SECURE 2.0 Act).

For cross-border families, these strategies need to be evaluated against the Canadian rules too. A prescribed-rate loan to a family trust may avoid Canadian attribution, but the trust income distributed to a US-citizen child is still unearned income for kiddie tax purposes. The treaty doesn’t override the kiddie tax. The US and Canadian planning tracks need to be coordinated so that a move that saves tax on one side doesn’t create a larger problem on the other.

What are the most common mistakes?

The kiddie tax catches families in predictable ways. These are the errors we see most often, and each one is avoidable with proper planning.

Not filing a return for the child at all. Many parents don’t realize that a child with more than $1,300 in unearned income has a filing obligation. The child may be 8 years old, but the IRS expects a return. Interest and dividends from custodial accounts are reported on 1099s under the child’s Social Security number, and the IRS matches those 1099s against filed returns.

Forgetting the FBAR for Canadian accounts. A US-citizen child with Canadian bank or investment accounts doesn’t get an exemption from FBAR filing because they’re a minor. If the aggregate value exceeds $10,000 at any point during the year, the FBAR is due. Parents can file on behalf of the child, but many don’t realize the requirement exists.

Using Form 8814 when Form 8615 saves more tax. Form 8814 is convenient but usually costs more. The parent’s election forfeits the child’s standard deduction and taxes the first $1,300 at the parent’s rate. Filing a separate return with Form 8615 almost always produces a lower total tax bill.

Ignoring the cross-border attribution mismatch. A Canadian parent who transfers investments to a US-citizen child faces attribution in Canada and kiddie tax in the US. The foreign tax credit coordination requires tracking which country taxed the income, on whose return, and ensuring the child’s US return claims the appropriate credit. Getting this wrong means either double tax or a missed credit.

Assuming the kiddie tax ends at 18. It doesn’t, necessarily. An 18-year-old whose earned income is less than half their support is still subject to the kiddie tax, and full-time students are subject to it through age 23.

Confusing the treaty with kiddie tax relief. The Canada-US tax treaty addresses double taxation through credits and taxing-right allocation, but it doesn’t override domestic rules like IRC 1(g). A US-citizen child in Canada is subject to the kiddie tax on the same terms as a US-resident child.

What should I do next?

If you have a child with investment income above $2,600, or a US-citizen child living in Canada with any investment income, the kiddie tax analysis is worth doing before it becomes a compliance problem. The thresholds are low, the reporting requirements are strict, and the cross-border coordination needs attention to both countries’ rules.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.