If your children have income-generating assets sitting in a custodial account, you need to understand the kiddie tax before it catches you off guard at filing time.
Why the kiddie tax exists
The rule was created to stop wealthier parents from shifting assets into a child’s name purely to take advantage of the child’s lower tax bracket. It’s gone through several versions over the years, but the current structure taxes a minor’s unearned income, including capital gains distributions, dividends, and interest, at the parents’ tax rate once it crosses an annual threshold ($2,700 for 2025).
How the math actually breaks down
The rule applies to dependent children under 18 at the end of the tax year, and to full-time students younger than 24. Within that group, the calculation works in three tiers. The first $1,350 of a child’s unearned income is covered by the kiddie tax’s own standard deduction, so it isn’t taxed at all. The next $1,350 is taxed at the child’s own marginal rate, which is typically low. Anything above $2,700 gets taxed at the parents’ marginal rate, which for a high earner can be a significant jump from what the child would have paid on their own.
Where it gets more complicated
If your child also has earned income, from a summer job or freelance work, the rules layer on additional complexity that this basic breakdown doesn’t cover. That’s a case where you want a tax advisor involved rather than guessing. For the specifics on how earned and unearned income interact, IRS Publication 929 covers the mechanics in detail, though be aware it hasn’t been updated since 2021 and some figures may have shifted since.
The practical takeaway is simple: if you’ve set up a custodial account for a child and it’s generating meaningful dividends, interest, or capital gains, don’t assume it’s taxed the same way your own account would be. Run the numbers against the current thresholds, and if the account is producing anywhere near the $2,700 mark, talk to a tax advisor before you file.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
