How the Kiddie Tax Works

The “kiddie tax” is a set of U.S. rules designed to prevent parents from shifting investment income into a child’s name to exploit lower tax brackets. Under this regime, a portion of a child’s unearned income—typically interest, dividends, or capital gains—is taxed at the parents’ marginal rate rather than the child’s rate. The rules apply to most children under age 18 and to full‑time students between ages 18 and 23 whose earned income does not exceed half of their support. Understanding how the kiddie tax is calculated helps families plan for college savings, custodial accounts, and other investments held for minors.

For the 2024 tax year the IRS establishes three key thresholds. The first $1,250 of a child’s unearned income is shielded by the dependent’s standard deduction and is therefore untaxed. The next $1,250 is taxed at the child’s marginal rate, which is often 10% if the child has no significant earned income. Any unearned income above $2,500 is subject to the parents’ marginal rate. The calculator applies this structure to determine the total tax owed.

Because dependents are entitled to a standard deduction equal to the greater of $1,250 or earned income plus $400 (up to the regular single filer standard deduction), the inputs include the child’s earned income. This amount influences whether any unearned income spills into the taxed layers. If earned income plus $400 exceeds $1,250, a larger portion of unearned income becomes sheltered. Mathematically, the deduction is:

Where D is the standard deduction and E represents earned income. The calculator subtracts D from the total of earned and unearned income to determine taxable income. Only the unearned portion is then layered through the kiddie tax brackets. The tax on each layer is computed as:

Here A_i is the amount of income in layer i and r_i is the corresponding tax rate (0%, the child’s rate, or the parent’s rate). The calculator also displays a table that itemizes each portion for transparency.

The kiddie tax can have a meaningful impact on college savings plans. For example, a grandparent might gift appreciated stock to a grandchild thinking the child will pay little tax when the shares are sold for tuition. If the gain exceeds the threshold, a substantial portion may actually be taxed at the parents’ higher rate. Families can mitigate this by timing asset sales over multiple years, harvesting losses, or exploring tax‑advantaged accounts like 529 plans where growth is sheltered when used for education.

Another nuance is that the kiddie tax applies only to unearned income. A teenager who works a part‑time job and earns wages is generally taxed at the child’s own rate, even if the parent claims them as a dependent. Earned income can effectively expand the standard deduction for dependents, sheltering some investment income. In households where a child has both wages and dividends, the interaction between earned and unearned income can be complex. The calculator incorporates earned income to capture this dynamic.

Consider a scenario where a 16‑year‑old has $500 of earned income from babysitting and $5,000 in dividend income. The dependent’s standard deduction becomes $900 ($500 + $400). This shelters the first $900 of combined income, leaving $4,600 of unearned income exposed. The first $1,250 of that unearned amount is taxed at 0%, the next $1,250 at the child’s 10% rate, and the remaining $2,100 at the parents’ rate, say 24%. The table produced by the calculator would show $0 of tax on the first layer, $125 on the second layer, and $504 on the last layer, for a total kiddie tax of $629.

In 2018 and 2019 the Tax Cuts and Jobs Act temporarily changed the kiddie tax to use trust tax brackets, which subjected modest income to extremely high rates. The SECURE Act later reverted the tax to the parents’ marginal rate, restoring the prior structure. These legislative shifts highlight the importance of staying current on tax law, as rules can change from year to year. The calculator is programmed with the current thresholds but includes input fields for rates so that users can adapt it to future changes.

Parents planning to transfer assets to children should also be aware of the “kiddie tax election,” which allows certain unearned income (such as interest and dividends shown on Form 1099‑DIV or INT) to be reported on the parents’ return using Form 8814 instead of filing a separate return for the child. While this can simplify paperwork, it may increase the parents’ adjusted gross income, potentially affecting other tax credits or deductions. The calculator focuses on the standard method where the child files their own return, but the underlying tax liability is the same.

Ultimately, the kiddie tax is a balancing act between encouraging savings for children and preventing abusive tax shelters. By modeling the tax impact ahead of time, families can decide whether to hold assets in the child’s name, delay realizing income, or pursue other strategies. This calculator aims to make those decisions easier by breaking down complex rules into clear numbers. When planning for your child’s financial future, combine the insights from this tool with professional advice tailored to your specific situation.