Investment income in a custodial brokerage account is taxed to the child, not the parent, but the rates work in three tiers. For 2026, the first $1,350 of a dependent child’s unearned income is wiped out by the standard deduction, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed at the parent’s marginal rate under the Kiddie Tax.1Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income The account itself is set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), and the assets belong to the child from the moment they go in, even though an adult custodian manages the investments until the child reaches the age of majority.
The Child Is the Taxpayer
Every dollar of dividends, interest, and capital gains inside the account is reported under the child’s Social Security number. The brokerage issues the 1099-INT, 1099-DIV, and 1099-B in the child’s name. That makes the child a taxpayer as soon as the account throws off income, and it also gives the child their own standard deduction, which for a dependent with unearned income is $1,350 in 2026.2Internal Revenue Service. Topic No. 551, Standard Deduction
The Three Tiers for 2026
Congress built the Kiddie Tax to stop high-income parents from parking investment portfolios in their children’s names and using the child’s lower bracket. The mechanics are simple once you see the tiers.3Internal Revenue Service. Instructions for Form 8615
- $0 to $1,350: tax-free, absorbed by the dependent’s standard deduction.
- $1,351 to $2,700: taxed at the child’s own rate, usually 10%.
- Over $2,700: taxed at the parent’s marginal rate, which can reach 37% on ordinary income.
Take a child with $5,000 of dividend income. The first $1,350 costs nothing. The next $1,350 is taxed at the child’s rate. The remaining $2,300 is taxed at the parent’s rate. In the 32% bracket, that last slice costs $736 rather than the $230 it would cost at 10%.
Who the Kiddie Tax Applies To
It does not end at a single birthday. The Kiddie Tax applies to any child who, at the end of the tax year, meets one of these tests:
- Under 18.
- 18, and did not earn more than half of their own support from earned income.
- 19 through 23, a full-time student, and did not earn more than half of their own support.
At least one parent must be alive at year-end, and the child cannot file a joint return.3Internal Revenue Service. Instructions for Form 8615 The student rule catches families off guard: a college sophomore with a sizable custodial account is still inside the Kiddie Tax if summer job earnings don’t cover more than half of living expenses.
Which Parent’s Rate Gets Used
For married parents filing jointly, the joint return’s rate applies. If they file separately, the IRS uses whichever return has the higher taxable income. For divorced or separated parents, the rate belongs to the custodial parent, meaning the one with physical custody for the greater part of the year. If that custodial parent has remarried, the joint return of the custodial parent and stepparent becomes the reference return.4Internal Revenue Service. Instructions for Form 8615
Capital Gains Inside the Account
Both short-term and long-term capital gains count as unearned income for Kiddie Tax purposes. Below $2,700, gains get the same favorable treatment as interest and dividends. Above that line, the character of the gain still matters. Long-term gains above the threshold are taxed at the parent’s long-term capital gains rate (0%, 15%, or 20%, depending on the parent’s income). Short-term gains above the threshold are taxed at the parent’s ordinary rate, which can be much higher. Holding a position for more than a year before selling can be the difference between a 15% rate and a 37% rate on the excess.
One belief worth correcting: some families assume the child qualifies for the 0% long-term capital gains bracket that applies to low-income taxpayers. For gains above $2,700, the Kiddie Tax pegs the rate to the parent’s income, so that 0% bracket is not available.
How to Report It: Form 8814 or Form 8615
The IRS offers two reporting paths, and the choice has real consequences.
Form 8814: Report on the Parent’s Return
Form 8814 lets a parent fold the child’s investment income into their own Form 1040 and skip a separate child return. It is only available if all of these are true:
- The child’s gross income was less than $13,500 for the year.
- The child’s only income was interest, dividends, and capital gain distributions (not gains from selling securities).
- No estimated tax payments were made in the child’s name.
5Internal Revenue Service. Instructions for Form 8814 One sale of stock or mutual fund shares inside the custodial account eliminates Form 8814 as an option.
Form 8615: File a Return in the Child’s Name
Form 8615 attaches to the child’s own Form 1040 and calculates the Kiddie Tax by referencing the parent’s rate. It is mandatory when the child has capital gains from sales, income above $13,500, estimated tax payments in their name, or earned income alongside the unearned income.3Internal Revenue Service. Instructions for Form 8615 The parent or custodian signs the return on behalf of a child too young to sign.
Why Adding the Income to Your Own Return Can Backfire
Form 8814 looks like the easier path, and often it is not. When the child’s income lands on the parent’s Form 1040, it raises the parent’s adjusted gross income. A higher AGI can shrink or eliminate the child tax credit, education credits, the earned income credit, the traditional IRA deduction, and the student loan interest deduction.6Internal Revenue Service. Instructions for Form 8814 For a parent close to any of these phase-out thresholds, a few thousand dollars of custodial account income can cost more than the tax on the income itself. Filing the child’s own return with Form 8615 keeps the income off the parent’s AGI entirely.
If You Missed a Filing
Plenty of families don’t realize a filing was ever required, especially with modest balances. When the child’s unearned income exceeds the standard deduction and no return is filed, the IRS can assess a failure-to-file penalty of 5% of the unpaid tax for each month the return is late, up to 25%. If the return is more than 60 days late, the minimum penalty is $525 or 100% of the tax due, whichever is less.7Internal Revenue Service. Failure to File Penalty Interest also accrues on any unpaid balance from the original due date. The child is technically the taxpayer, but when the child is too young to file, the responsibility sits with the parent or custodian. The IRS generally reduces penalties for taxpayers who correct a missed filing before the agency contacts them.
When the Child Takes Over
The custodial account terminates when the child reaches the age of majority, which ranges from 18 to 25 depending on the state and whether the account is UGMA or UTMA. The custodian then transfers full control to the now-adult child. The transfer itself is not a taxable event: no gains are realized, and the cost basis of every holding carries over unchanged. Keep the original cost basis records. When the young adult later sells, the gain or loss is measured from the original purchase price in the custodial account, not the value on the transfer date. From then on, all income in the account is taxed at the adult child’s own rate, and the Kiddie Tax no longer applies once the child is past the age thresholds and providing more than half of their own support.