Investment income in a UTMA custodial account is taxed to the child, not the parent, and UTMA tax rates for 2026 follow a three-tier structure: the 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 is taxed at the parent’s marginal rate under the Kiddie Tax.1Internal Revenue Service. Rev. Proc. 2025-32 That top tier is the whole reason the Kiddie Tax exists. It stops families from parking large sums in a child’s account to exploit a lower bracket.
Unearned income means interest, dividends, capital gains, and other investment returns. Wages the child earns from a job are taxed at the child’s own rate and sit outside the Kiddie Tax entirely.
Who the Kiddie Tax Applies To
A child falls under the Kiddie Tax if they are under 18 at year-end. It also reaches 18-year-olds whose earned income doesn’t cover more than half their own support, and full-time students aged 19 through 23 who meet the same support test and are claimed as dependents.2Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) Once the child ages out or becomes self-supporting, all investment income is taxed at their own individual rate.
You may see older guides describe the Kiddie Tax as using compressed trust and estate brackets. That method applied only in 2018 and 2019, and the SECURE Act of 2019 repealed it. From 2020 forward, the excess is taxed at the parent’s rate.3Internal Revenue Service. Instructions for Form 8615
The 2026 Rate Tiers in Practice
The IRS adjusts the thresholds each year for inflation. For 2026:1Internal Revenue Service. Rev. Proc. 2025-32
- First $1,350 of unearned income: tax-free. This is the dependent’s standard deduction for unearned income.
- Next $1,350, up to $2,700: taxed at the child’s own marginal rate, typically 10%.
- Above $2,700: taxed at the parent’s marginal rate, if higher than the child’s.
The actual bite in the top tier tracks whatever bracket the parent is in. A parent in the 22% bracket sees excess unearned income taxed at 22%; a parent in the 37% bracket pays 37% on it. Mechanically, the child’s net unearned income is stacked on top of the parent’s taxable income to find the applicable rate.3Internal Revenue Service. Instructions for Form 8615 If more than one child is subject to the Kiddie Tax, their net unearned income is combined first and then allocated back to each.4Office of the Law Revision Counsel. 26 USC 1 – Section: (g) Certain Unearned Income of Children Taxed as if Parent’s Income
For a modest UTMA, the numbers stay small. An account earning $2,700 or less in a year owes at most about $135 in federal tax (10% on the second $1,350). The cost climbs sharply once dividends or gains push past $2,700.
Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends have their own rate schedule that caps at 20%. For 2026, a single filer (including a dependent child) pays 0% on long-term gains up to $49,450 of taxable income and 15% between $49,450 and $545,500. On the child’s own income alone, most UTMA beneficiaries stay in the 0% band.
The Kiddie Tax changes that math above $2,700. The applicable capital gains rate is determined by layering the child’s net unearned income onto the parent’s return, so the parent’s income drives the rate.3Internal Revenue Service. Instructions for Form 8615 A child with $5,000 in long-term gains might owe nothing on a standalone basis, but if the parent’s taxable income already exceeds $49,450, the portion caught by the Kiddie Tax gets taxed at 15%.
Short-term gains from assets held under a year get no preferential rate. They’re ordinary income and run through the same three-tier structure.
Filing Options and Why the Choice Matters
When a child subject to the Kiddie Tax has more than $2,700 in unearned income, Form 8615 has to be filed to calculate the tax. The 1099s come under the child’s Social Security number, so the reporting obligation follows the child. The custodian usually handles the paperwork.
Filing in the Child’s Name With Form 8615
The default approach is a Form 1040 in the child’s name with Form 8615 attached. Form 8615 asks for the parent’s Social Security number and filing status because it needs the parent’s taxable income to compute the correct rate on the excess.3Internal Revenue Service. Instructions for Form 8615 The form compares the tax at the child’s rate with the tax computed using the parent’s rate on the excess, and the child owes the larger amount.
Electing to Report on the Parent’s Return With Form 8814
A parent can instead pull the child’s income onto their own return with Form 8814, but only if all three conditions hold: the child’s income is entirely interest, dividends, and capital gain distributions; the child’s 2026 gross income falls between $1,350 and $13,500; and the child isn’t filing a joint return.5Internal Revenue Service. Instructions for Form 8814
Form 8814 is simpler, but it isn’t always cheaper. Adding the child’s income to the parent’s return raises the parent’s adjusted gross income, and a higher AGI can shrink or wipe out credits and deductions the parent would otherwise claim. Near an AGI cliff for education credits or similar benefits, the convenience can cost more than it saves.
The Net Investment Income Tax
A child subject to the Kiddie Tax can also owe the 3.8% Net Investment Income Tax on unearned income if their modified adjusted gross income exceeds $200,000.2Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) Most won’t get there. A one-time sale of highly appreciated stock inside a large UTMA can, and the 3.8% sits on top of the regular Kiddie Tax when it does.
What Changes When the Child Ages Out
Once the child no longer meets the Kiddie Tax age and support tests, all investment income is taxed at their own marginal rate. The custodian transfers the assets to the beneficiary at the age set by state law, which ranges from 18 to 25 depending on the state and the original transfer.6Social Security Administration. SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA) A young adult with modest earnings often lands in the 10% or 12% bracket, and long-term gains up to the 0% capital gains threshold escape federal tax entirely.
Cost basis does not reset at the transfer. Whatever the custodian originally paid for each holding carries over. If $10,000 grew to $40,000, the beneficiary owes capital gains tax on the $30,000 built-in gain when they sell. Keep the original purchase dates and prices with the account records; reconstructing them later is difficult.
Two Related Costs Worth Knowing About
Two items sit outside the rate question but are easy to conflate with it. First, contributions to a UTMA are irrevocable gifts to the child.7Social Security Administration. POMS SI 01120.205 – Uniform Transfers to Minors Act For 2026, each donor can give up to the $19,000 annual gift tax exclusion per child without filing a gift tax return; larger gifts count against the lifetime estate and gift tax exemption. Second, UTMA balances are treated as the student’s assets on the FAFSA and are assessed at 20% in the expected family contribution, compared with roughly 5.64% for parent-owned assets. That treatment can outweigh any income tax savings for families approaching college.