Income inside a UTMA custodial account belongs to the child who owns it, and under the UTMA tax rules the IRS applies, that unearned income is taxed in three tiers: for tax year 2026, the first $1,350 is tax-free, 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 what’s commonly called the kiddie tax.1Internal Revenue Service. Revenue Procedure 2025-32 How much the account earns, and what kind of income it is, decides whether anyone files a return and which form does the work.
The Three Kiddie Tax Tiers
Every dollar of interest, dividends, and capital gains in a UTMA counts as the child’s unearned income. For 2026 the structure is:
- First $1,350: tax-free, covered by the dependent’s standard deduction for unearned income.
- Next $1,350 (up to $2,700 total): taxed at the child’s own marginal rate, usually 10%.
- Above $2,700: taxed at the parent’s marginal rate.
The purpose of the structure is to stop families from parking investment assets in a child’s name to get them taxed at a lower rate. The thresholds adjust for inflation each year.1Internal Revenue Service. Revenue Procedure 2025-32
Who the Kiddie Tax Applies To
The rule reaches further than most parents expect. A child is subject to the kiddie tax if, at year end, they fit one of these descriptions:
- Under 18, regardless of earned income.
- Age 18, if their earned income doesn’t cover more than half of their own support.
- Ages 19 through 23 and a full-time student, under the same support test.
A 22-year-old college senior with a UTMA still falls under these rules if their part-time job doesn’t cover half their living expenses.2Office of the Law Revision Counsel. 26 USC 1(g) – Certain Unearned Income of Children Taxed as if Parents Income At least one parent must be alive at year end, and the child cannot file a joint return.
How Different Types of Income Are Taxed
The tier structure is the same, but the rate applied inside each tier depends on the type of income.
Interest, ordinary dividends, and short-term capital gains are taxed as ordinary income. Banks and brokers report these on Form 1099-INT and Form 1099-DIV.3Internal Revenue Service. General Instructions for Certain Information Returns (2025) The second tier is taxed at the child’s 10% ordinary rate; the third tier is taxed at the parent’s ordinary rate.
Long-term capital gains and qualified dividends keep their preferential rates, but the kiddie tax still controls whose rate applies. If a UTMA generates $10,000 in long-term gains, the first $2,700 falls within the child’s rates (where qualified dividends and long-term gains can be taxed at 0%). The remaining $7,300 is taxed at the parent’s long-term capital gains rate, typically 15% or, for high-income parents, 20%.
When a Return Is Required
A dependent child must file a federal return if unearned income exceeds $1,350 for 2026.4Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information Below that, no return is needed because the income sits inside the standard deduction.
When filing is required, there are two routes. The child files their own Form 1040, or the parent elects to report the child’s income on the parent’s return.
Reporting the Child’s Income on a Parent’s Return (Form 8814)
A parent can fold a child’s investment income into their own return by attaching Form 8814. The election is only available when every one of these is true:
- The child’s only income is interest and dividends, including capital gain distributions.
- The child’s gross income for 2026 is more than $1,350 and less than $13,500.
- The child would otherwise be required to file.
Any rental income, royalties, or earned income beyond a de minimis amount knocks out the election, as does gross income of $13,500 or more.5Internal Revenue Service. Instructions for Form 8814 (2025)
The Child’s Own Return (Form 8615)
If the child files Form 1040 and unearned income exceeds $2,700, Form 8615 is attached and does the kiddie tax calculation. It takes the child’s net unearned income above $2,700, uses the parent’s taxable income to determine the applicable rate, and figures the tax at the parent’s marginal rate.6Internal Revenue Service. Instructions for Form 8615 (2025) The custodian needs the parent’s taxable income to complete the form, which can be awkward when divorced parents don’t share tax information.
Why Form 8814 Can Cost More Than It Saves
The Form 8814 election looks convenient but has two costs. First, qualified dividends and long-term gains that would qualify for the 0% rate in the child’s second tier instead get taxed at a flat 10% when reported on the parent’s return. The IRS acknowledges this can run up to $135 in extra tax per child.5Internal Revenue Service. Instructions for Form 8814 (2025)
Second, the child’s income inflates the parent’s adjusted gross income. A higher AGI can shrink or eliminate the child tax credit, earned income credit, education credits, the student loan interest deduction, and deductible IRA contributions. For families near any of those phaseouts, the real cost of the election can be well above $135.
Gifts Into the Account and an Estate Trap
Funding a UTMA is an irrevocable gift. For 2026 the annual gift tax exclusion is $19,000 per recipient, so a donor can contribute up to that amount per child without filing a gift tax return. Married couples can combine exclusions for $38,000 per child per year. Contributions above the exclusion require Form 709, though gift tax is typically not owed until the donor’s lifetime exemption is used up.7Internal Revenue Service. Frequently Asked Questions on Gift Taxes
There is a trap worth avoiding. If the person who funds the UTMA also serves as custodian and dies before the child reaches majority, the IRS treats the assets as part of the donor’s taxable estate under IRC 2038, because the custodian’s power to decide how funds are spent is a retained power. The fix is to name someone other than the donor as custodian. A grandparent who funds the account can name a parent as custodian, or the reverse.
Basis Carries Over From the Donor
When someone contributes appreciated assets to a UTMA, the donor’s tax basis carries to the child. If a grandparent bought stock for $5,000 and transferred it when it was worth $15,000, the child’s basis is still $5,000, and gain on a future sale is measured from that figure.8eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift A dual-basis rule applies if the asset was worth less than the donor’s basis at the time of the gift, so built-in losses can’t be shifted to the child.
What Happens When the Account Terminates
A UTMA ends when the beneficiary reaches the age of majority under state law. That age is usually 21, with a range of 18 to 25 depending on the state and how the account was set up. Some states let the person creating the account specify a later termination age at funding. At termination, the custodian transfers full control to the now-adult beneficiary.9Social Security Administration. POMS SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act
The handover itself is not a taxable event. The assets already belonged to the minor during the custodianship; only legal control changes. From that point on, the former minor reports all investment income on their own return, and the kiddie tax stops applying once they age out of the rules above.
A Note on College Financial Aid
Taxes aren’t the only cost. UTMA assets are treated as the student’s on the FAFSA and assessed at a 20% rate, meaning $10,000 in a UTMA reduces aid eligibility by $2,000. Parent-owned assets face a maximum assessment of roughly 12%, often much less after allowances.10Federal Student Aid. Student Aid Index and Pell Grant Eligibility, 2025-2026 FSA Handbook Families counting on need-based aid should weigh this against the tax picture before building a large UTMA balance.