Kiddie Tax Limit: Unearned Income, Calculation, and Reporting

The kiddie tax limit for 2026 works in three tiers: a child’s first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s own rate (usually 10%), and anything above $2,700 gets taxed at the parent’s marginal rate, which can reach 37%.¹ The rule exists to stop families from parking investment portfolios in a child’s name to capture a lower tax bracket. These thresholds are adjusted for inflation each year, and the IRS publishes the updated figures in a revenue procedure released the fall before the tax year begins.

A quick example shows why the top tier matters. If a 15-year-old has $5,000 in dividends and interest during 2026, the first $1,350 is tax-free, the next $1,350 is taxed at the child’s rate, and the remaining $2,300 is taxed at the parent’s rate. A parent in the 32% bracket owes $736 on that top slice alone.

Which Children the Kiddie Tax Applies To

The rule only reaches a child who meets every one of the following conditions. Miss one and the kiddie tax doesn’t apply.

The child was under 18 at year-end; or was exactly 18 and didn’t have earned income covering more than half of their own support; or was a full-time student aged 19 through 23 whose earned income didn’t cover more than half of their own support.
The child is required to file a federal tax return for the year.
At least one parent was alive at the end of the tax year.
The child does not file a joint return with a spouse.
The child had more than $2,700 in unearned income for 2026.

The age and support tests are where families get tripped up. A 17-year-old with a large custodial account is subject to the kiddie tax no matter how much they make from a summer job. A working 18-year-old whose wages cover more than half their living expenses falls outside the rule entirely.² The same self-support test applies to full-time students aged 19 through 23.

What Counts as Unearned Income

Unearned income is money that didn’t come from working. It includes:

Interest from savings accounts, CDs, and bonds.
Ordinary and qualified dividends from stocks and mutual funds.
Capital gains, including capital gain distributions from mutual funds.
Rents and royalties from property or intellectual property the child owns.
Taxable scholarship money not used for tuition, fees, or required course materials.²

Wages from a job and self-employment income are earned income. They are always taxed at the child’s own rate no matter how much the child makes, and the kiddie tax never touches them. That line between earned and unearned drives most of the planning options later in this article.

How the Tax Is Calculated

The kiddie tax is computed on Form 8615, which is attached to the child’s own Form 1040. The mechanics are:³

Start with the child’s total unearned income.
Subtract $2,700 (the two $1,350 tiers combined for 2026).
The remainder is “net unearned income,” and it is taxed at the parent’s marginal rate.

If the calculation produces zero or a negative number, the child still attaches Form 8615 to their return, but nothing gets added on top of the child’s own rate.³ To finish the form you need the parent’s Social Security number and the parent’s taxable income from Form 1040, line 15. That second requirement creates a scheduling problem: if the parent hasn’t finalized their own return, the child’s return can’t be finished either. An extension for the child is sometimes the practical answer.

Selecting the right parent’s information matters when the family situation is anything other than a straightforward joint return. Married filing separately uses the higher-income parent’s return. Divorced or legally separated parents use the custodial parent’s return, and a remarried custodial parent brings the stepparent into the picture as the child’s parent for this purpose.⁴ Using the wrong parent’s figures triggers IRS notices because the Social Security number on the form won’t match the income the agency has on file.

Reporting the Child’s Income on Your Own Return

There is an alternative to filing a separate return for the child. Form 8814 lets a parent fold the child’s income into their own return, but only when every one of these is true:

The child’s only income was interest, dividends, and capital gain distributions.
The child’s gross income for the year was less than $13,500.
No estimated tax payments were made in the child’s name.
No backup withholding applied to the child’s income.

Convenience has a cost. Adding the child’s income to yours raises your adjusted gross income, which can chip away at the child tax credit, education credits, and the earned income credit. And if the child received qualified dividends or capital gain distributions that would have qualified for the 0% preferential rate on a separate return, Form 8814 can cost as much as $135 more in tax, because the 10% rate on the second tier replaces that preferential treatment.⁵ For small amounts and families not near credit phase-outs, Form 8814 saves paperwork. For most others, filing the child’s own return with Form 8615 comes out cheaper.

Ways to Reduce Exposure

The kiddie tax is avoidable, but the strategies require thinking a year or more ahead rather than reacting in December.

Hold tax-exempt bonds. Municipal bond interest is exempt from federal income tax, so it never enters the unearned income calculation. For a custodial account funding a young child, municipal bond funds are one of the cleanest income sources.

Favor growth over current income. Assets that appreciate without paying dividends or interest, such as growth stocks, don’t generate taxable unearned income until they’re sold. If the child will age out of the kiddie tax before the sale, the eventual gain lands at the child’s own rate.

Fund a Roth IRA when the child has a job. A child with earned income can contribute up to the lesser of that earned income or the annual limit. Growth is tax-free, and qualified withdrawals are too.

Use a 529 plan. Contributions grow tax-deferred, and distributions used for qualified education expenses come out tax-free. Money in a 529 never generates the kind of unearned income the kiddie tax reaches.

Put the child on the payroll of a family business. Reasonable wages for actual work move dollars from unearned to earned. For a sole proprietorship, wages paid to a child under 18 are also exempt from Social Security and Medicare taxes.

If You Skip the Kiddie Tax

The IRS matches 1099s to Social Security numbers, so interest and dividends reported under a child’s SSN that never make it onto a return will draw a notice. Once that happens:

The IRS recalculates the tax at the parent’s rate and bills the difference.
Interest runs from the original due date. For the first quarter of 2026, the underpayment rate for individuals is 7% annually.⁶
A 20% accuracy-related penalty can apply if the underpayment was due to negligence or disregard of the rules.
Parents who elect Form 8814 without adjusting their withholding or estimated payments can face a separate estimated tax penalty.

Filing an incorrect Form 8615, whether from using the wrong parent’s income or miscalculating net unearned income, is treated the same as any other return error. Waiting for the parent’s return to be finalized before completing the child’s is the simplest way to keep the numbers consistent.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
3
Internal Revenue Service. Form 8615 – Tax for Certain Children Who Have Unearned Income
4
Internal Revenue Service. Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
5
Internal Revenue Service. Instructions for Form 8814
6
U.S. Department of Labor. IRC 6621 Table of Underpayment Rates