8601 / What is the “kiddie tax”?

The so-called “kiddie tax” is designed to prevent parents from shifting unearned income that would otherwise be taxed at their higher rates to their children to be taxed at lower rates. To prevent this type of income shifting, the kiddie tax subjected a child’s unearned income in excess of certain threshold levels (see below) to taxation at the parents’ highest marginal tax rate.

The 2017 tax reform legislation aimed to simplify the treatment of unearned income of minors by applying the tax rates that apply to trusts and estates to this income. Therefore, under the tax reform rule, earned income of minors was to be taxed according to the individual income tax rates prescribed for single filers,² and unearned income of minors was to be taxed according to the applicable tax bracket that would apply if the income was that of a trust or estate (for both income that would be subject to ordinary income tax rates and income that would receive capital gains treatment).³

Under pre-reform law, which is once again applicable (see Editor’s Note, above), for the kiddie tax to apply, at least one parent must be alive at the close of the taxable year. The parent whose taxable income was taken into account is (a) in the case of parents who are not married, the custodial parent of the child (determined by using the support test for the dependency exemption, see Q 8520) and (b) in the case of married individuals filing separately, the individual with the greater taxable income.⁴ If the custodial parent files a joint return with a spouse who was not a parent of the child, the total joint income is applicable in determining the child’s rate. If there was an adjustment to the parent’s tax, the child’s resulting liability also must be recomputed. In the event of an underpayment, interest, but not penalties, are assessed against the child.⁵

The kiddie tax applies only to “net unearned income.” “Net unearned income” is defined as adjusted gross income that is not attributable to earned income, and that exceeds (in 2025) (1) the $1,350 standard deduction for a dependent child plus (2) the greater of $1,350 or earned income plus $450.⁶ The source of the assets that produce unearned income need not be the child’s parents.⁷

“Earned income” means all compensation for personal services actually rendered.⁸ A child is therefore taxed at his own rate on reasonable compensation for services that he or she performs.

Regulations specify that “unearned income” includes any Social Security or pension payments received by the child, income resulting from a gift under the Uniform Gifts to Minors Act, and interest on both earned and unearned income.⁹

The kiddie tax applies to:

(1)  a child under age 18; or

(2) a child age who has reached age 18, but whose earned income does not exceed one-half of his or her support; or

(3) a child aged 19 to 23 who is a full-time student with earned income that does not exceed one-half of his or her support.¹⁰

Whether a child’s age is below the threshold ages listed above is determined at the end of the tax year. “Child,” for purposes of the kiddie tax, includes children who are adopted, related by half-blood, or from a prior marriage of either spouse.¹¹ The kiddie tax applies without regard to whether the child is considered a dependent for tax purposes.