The Kiddie Tax is a U.S. tax rule designed to prevent parents from shifting investment income to their children to take advantage of lower tax rates. Here’s a short summary:
What is the Kiddie Tax?
- It applies to unearned income (like interest, dividends, and capital gains) of a child under age 19, or under 24 if a full-time student and not providing more than half their own support.
- For 2025, the first $1,300 of unearned income is tax-free (standard deduction), and the next $1,300 is taxed at the child’s rate.
- Unearned income over $2,600 is taxed at the parents’ marginal tax rate.
Ways to Avoid or Minimize the Kiddie Tax
- Use Tax-Advantaged Accounts: Invest in 529 college savings plans or Roth IRAs for kids (if they have earned income).
- Keep Unearned Income Below Thresholds: Stay under the $2,600 threshold.
- Invest in Tax-Deferred or Tax-Free Vehicles: Such as U.S. Savings Bonds or growth stocks that don’t pay dividends until sold.
- Shift to Earned Income: Encourage kids to earn income from jobs, which is not subject to the Kiddie Tax.
- Gift to Older Children or Adults: Once children are past the Kiddie Tax age limits, the rules no longer apply.