Are Children’s Bank Accounts Taxable? Kiddie Tax and Filing Rules

Yes, children’s bank accounts are taxable: any interest the account earns is the child’s income, reported to the IRS under the child’s Social Security number. For 2026, the first $1,350 of a child’s unearned income is covered by the dependent standard deduction and owes nothing. Interest between $1,350 and $2,700 is taxed at the child’s own rate, typically 10%. Anything above $2,700 gets pulled into the kiddie tax and is taxed at the parent’s marginal rate, which can reach 37%.¹

When Interest Triggers a Filing Requirement

The IRS treats every person as a separate taxpayer from birth. Banks report interest paid on a child’s account using the child’s Social Security number, so the agency already knows what each account produced.

If total unearned income (interest, dividends, and capital gains) stays at or below $1,350 for 2026, no return is needed and no tax is owed.¹ Once the total crosses that line, the child has a filing obligation. A parent or guardian prepares and signs the return when the child is too young to do it. If the child can’t sign, the parent signs the child’s name and adds “By [parent’s signature], parent for minor child.”²

The Kiddie Tax and How the Rate Climbs

The kiddie tax closes a loophole. Without it, parents could move investments into a child’s name and have the earnings taxed at the child’s low rate. Congress responded by taxing a child’s unearned income above a set threshold at the parent’s marginal rate.

For 2026 the math falls into three tiers:¹

First $1,350: covered by the dependent’s standard deduction. No tax.
$1,351 to $2,700: taxed at the child’s own rate, typically 10%.
Above $2,700: taxed at the parent’s marginal rate, up to 37%.³

A worked example: a child with $5,000 of interest and dividends owes nothing on the first $1,350, pays 10% on the next $1,350 ($135), and pays the parent’s rate on the remaining $2,300. If the parent sits in the 32% bracket, that last slice costs $736. Total tax: $871. At a flat 10% child rate the same income would generate about $365. The gap widens fast on larger balances.

Whose Kids This Covers

The kiddie tax reaches further than most parents assume. For 2026 it applies if the child, at year end, meets any of these:⁴

Under age 18, regardless of income sources.
Age 18, unless the child’s earned income covered more than half of their own support for the year.
Ages 19 through 23 and a full-time student, unless earned income covered more than half of their own support.

The self-support test is the way out. An 18-year-old working full-time who pays most of their own living costs falls outside the kiddie tax even with sizable investment income. A 22-year-old full-time student whose parents cover tuition, rent, and food stays subject to it, no matter how much the student earns part-time, as long as that job doesn’t clear the halfway mark. A child who files a joint return with a spouse is also not subject to the kiddie tax.⁵

Whose Return Reports It

Once a filing requirement kicks in, there are two paths.

A Separate Return for the Child

Filing a Form 1040 in the child’s name is always allowed and is sometimes required. If unearned income tops $2,700, Form 8615 is attached to run the kiddie tax calculation.⁵ A separate return is mandatory whenever the child has earned income from a job or income of any type other than interest, dividends, and capital gain distributions.

Rolling the Income Onto the Parent’s Return

Parents can report a child’s investment income on their own return using Form 8814, but only when every one of these is true:⁶

The child’s only income was interest, dividends, and capital gain distributions.
That income was more than $1,350 but less than $13,500.
The child was under 19, or under 24 if a full-time student, at year end.
No estimated tax payments were made for the child and no federal tax was withheld from the child’s income.

Form 8814 is simpler, but it adds the child’s income to the parent’s adjusted gross income. That can reduce or wipe out eligibility for the child tax credit, the earned income credit, education credits, the student loan interest deduction, and the deduction for traditional IRA contributions.⁶ The parent also loses deductions the child could have claimed on a separate return, such as an early-withdrawal penalty on savings or the child’s charitable contributions. For families near the phase-out of any of those benefits, a separate return often produces a lower combined bill.

Which Parent’s Rate Applies

Parents filing jointly use the joint return. Everyone else follows these rules:⁴

Divorced or legally separated: use the custodial parent’s return (the parent who had the child for more of the year).
Custodial parent has remarried: the stepparent counts as the child’s parent. A joint return controls; if the custodial parent and stepparent file separately, use whichever spouse has the higher taxable income.
Parents never married but living together: use whichever parent has the higher taxable income.
Parents never married and living apart: same rules as divorced parents.

Accounts That Sidestep the Tax

The account type matters as much as the balance.

Custodial accounts opened under UGMA or UTMA laws are fully subject to the kiddie tax. Every dollar of interest, dividends, or capital gains they generate is the child’s unearned income and moves through the three-tier structure above.⁵

529 college savings plans work on different rules. Earnings grow untaxed at the federal level, and withdrawals for qualified education expenses come out tax-free.⁷ Because the earnings are never recognized as income inside the plan, the kiddie tax never applies. The catch: the money must eventually go to education, or the earnings portion of a non-qualified withdrawal is taxed and hit with a 10% penalty.

Coverdell Education Savings Accounts offer a comparable benefit. Distributions used for qualified education expenses are tax-free to the beneficiary.⁸ Contribution limits are lower than a 529, but the account covers a wider range of expenses including K-12.

For education savings, 529 and Coverdell accounts are far more tax-efficient than a plain custodial savings account. For money that might be spent on something other than school, custodial accounts stay the default, and the kiddie tax is the cost of that flexibility.

Penalties for Skipping the Return

The IRS applies the same penalties to an unfiled child’s return that it applies to anyone else’s. A parent who overlooks $3,000 of interest in a custodial account doesn’t get a pass because the taxpayer is seven.

The failure-to-file penalty is 5% of the unpaid tax for each month the return is late, capped at 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $525 or 100% of the tax owed.⁹ Interest also runs daily on any unpaid balance from the original due date until the bill clears. Not knowing a return was due is not a defense the IRS accepts.

State income tax is a separate question. Most states with an income tax treat a child’s unearned income on similar lines, but thresholds and rates vary, and a child who owes nothing federally can still owe at the state level. Check your state’s filing rules on their own terms.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information
3
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
4
Internal Revenue Service. 2025 Instructions for Form 8615
5
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
6
Internal Revenue Service. 2025 Instructions for Form 8814
7
Internal Revenue Service. 529 Plans: Questions and Answers
8
Internal Revenue Service. Topic No. 310, Coverdell Education Savings Accounts
9
Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges