Kids' investment income: custodial accounts and the kiddie tax

Income in a child's account is the child's income, but past a certain point it is taxed at a parent's rate instead of the child's. That rule, and the one election that lets a parent report the income themselves, is the whole of this subject.

Unearned income, and why the label matters

Unearned income is everything that is not pay for work actually done. Interest and dividends are the common cases. So are capital gains, capital gain distributions included, rents and royalties, pension and annuity income, unemployment compensation, alimony, taxable scholarship and fellowship money that did not arrive on a Form W-2, the taxable slice of social security payments, and trust income that is not earned income.

The point of the list is what it leaves out. A summer job does not put a teenager anywhere near this rule. A brokerage account does.

The three slices

A child who can be claimed as a dependent has a standard deduction of their own, so a first slice of unearned income, $1,350 for 2025, is not taxed at all. Above $2,700 the parent's rate takes over, where that rate is the higher of the two. Between those two amounts sits a middle band taxed at the child's own rate, which is ten percent under the parent's election described below.

When a child must file Form 8615

Five conditions, and a child has to meet every one of them. Unearned income above $2,700. A filing requirement of the child's own. An age that fits one of three descriptions: under eighteen at the end of the year; eighteen at the end of the year with earned income that did not cover more than half of their support; or a full-time student, at least nineteen and under twenty-four at year end, whose earned income likewise did not cover more than half of their support. At least one parent alive at the end of the year. And no joint return filed for the year.

Two clarifiers come with that list. The rules bite whether or not the child is anyone's dependent. And a stepchild, or a child you adopted legally, counts as a child here.

Which parent's return the rate comes from

Separated families search for exactly this. Married parents filing jointly use the joint return. Married parents filing separately use whichever of them has the greater taxable income. Married but living apart, the custodial parent's return applies if that parent is considered unmarried, and otherwise the greater-income parent's. Divorced or legally separated, it is the custodial parent's return, unless that parent has remarried, in which case the stepparent stands in as the child's other parent. Parents who never married but lived together for the whole year use the greater-income parent's return; if they did not live together all year, the divorced rule applies instead.

The practical consequence is uncomfortable. A child's tax can depend on figures from a return the child has no right to see, which is why this gets planned in advance rather than discovered in April.

The parent's election, and what it costs

Form 8814 lets a parent report the child's interest and dividends on their own return, so the child files nothing. Every one of these has to hold. The child was under nineteen at year end, or under twenty-four as a full-time student. Nothing came in but interest and dividends, with Alaska Permanent Fund dividends and capital gain distributions counting as those. Gross income stayed under $13,500. The child is required to file. No joint return. No estimated tax payments were made for the child. And no federal income tax was withheld from that income. The parent has to be the right parent too, on the same rules as above.

There are two costs, and both are real. The first is the tax itself: where the child had qualified dividends or capital gain distributions, the election can cost as much as $135 more than a separate return would, because it taxes the middle band at ten percent while the child's own return could reach the preferential rates that start at zero.

What a parent should actually do

Keep the child's forms in the child's name, and look in December at whether the account will cross the threshold before the year closes. A child whose only income is wages is not in this at all. Nor does calling the account a college fund change any of it: the tax follows the income, not the intention. The 1099-INT and 1099-DIV covers the forms that arrive, and claiming dependents covers the tests that decide whose dependent the child is.