The Kiddie Tax in 2025: Rates, Limits, Rules, and How It Affects Your Child’s Income

What Is the Kiddie Tax?

The Kiddie Tax is a federal tax rule designed to prevent parents from shifting unearned income, like dividends or interest, to their children to take advantage of lower tax rates. First introduced in the 1980s, it applies to children who have investment income or unearned income above certain thresholds.

The tax applies to children under the age of 19 and, in some cases, to full-time students under 24 who are dependents. Unearned income includes interest, dividends, capital gains, and other investment earnings. The goal is to tax this income at the parents’ marginal tax rate rather than the child’s lower rate.

Key terms include:

• Unearned income: Income from investments, savings, and certain trusts
  
  
• Earned income: Wages or salaries from a job, not subject to Kiddie Tax
  
  
• Dependent: A child who qualifies under IRS rules for age, support, and residency

Who Does the Kiddie Tax Apply To?

The Kiddie Tax applies to children who meet these criteria:

• Under 18 at the end of the tax year, or
  
  
• Age 18 with earned income not exceeding half of their support, or
  
  
• Full-time student age 19–23, with investment income above the limit
  
  

The tax applies to unearned income exceeding the dependent unearned income limit for 2025. Children who earn wages from jobs are generally not affected unless they also have significant unearned income.

For 2025, children who are dependents and receive interest, dividends, or other investment income above the threshold must file a tax return. This includes children with UTMA or UGMA accounts, as income generated from these accounts is considered taxable unearned income.

Kiddie Tax Thresholds and Brackets for 2025

In 2025, the Kiddie Tax threshold is expected to adjust slightly with inflation. Generally, the first portion of unearned income is tax-free due to the standard deduction for dependents, and the rest is taxed at the parents’ tax rate.

2025 Thresholds (Expected)

• First $1,250: Tax-free standard deduction
  
  
• Next $1,250: Taxed at the child’s rate (usually 10%)
  
  
• Above $2,500: Taxed at the parents’ marginal rate
  
  

Example: A child with $5,000 in dividends would calculate taxes as:

• $1,250: tax-free
  
  
• $1,250: taxed at child’s rate
  
  
• $2,500: taxed at parents’ rate
  
  

Children with earned income do not include wages in the Kiddie Tax calculation. Parents can plan accordingly to minimize the tax burden.

Reporting and Paying the Kiddie Tax

To report the Kiddie Tax, parents or guardians use IRS Form 8615. Some options for filing include:

1. Child files separately: The child reports their income on Form 1040 and includes Form 8615
   
   
2. Parent elects to include income: Parents report the child’s unearned income on their own return
   
   

UTMA and UGMA Accounts

Income from UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts counts as unearned income. Parents should track distributions carefully, as they may trigger the Kiddie Tax if they exceed the thresholds.

Key Notes on Filing

• All dependent children with unearned income above the limit must file
  
  
• Minors can use an unearned income tax calculator to estimate taxes
  
  
• Form 8814 can simplify filing if only investment income is involved
  
  

How to Avoid or Minimize the Kiddie Tax

Parents can take several steps to reduce the impact of the Kiddie Tax:

1. Gift investments gradually: Avoid giving a large lump sum that generates significant unearned income in one year.
   
   
2. Invest in tax-advantaged accounts: Use 529 plans or Coverdell Education Savings Accounts. Earnings grow tax-free if used for education.
   
   
3. Time distributions strategically: Spreading dividends or interest across multiple years can keep the child under the threshold.
   
   
4. Consider earned income: Children can earn wages from a part-time job, which does not trigger Kiddie Tax.
   
   

Proper planning allows families to maximize tax savings while ensuring compliance with IRS rules.

Kiddie Tax and College Savings Plans

529 plans and Coverdell accounts are popular ways to save for college. The Kiddie Tax does not apply to earnings within these accounts, as long as funds are used for qualified educational expenses.

• Withdrawals for tuition, books, and room & board are tax-free
  
  
• If funds are used for non-educational purposes, earnings become taxable
  
  
• Distributions from custodial accounts (UTMA/UGMA) are subject to Kiddie Tax if they exceed thresholds
  
  

Parents should coordinate withdrawals and timing with the child’s other unearned income to avoid unnecessary taxes.

Common Questions About the Kiddie Tax

Do Minors Pay Taxes on Income?

Yes, minors with unearned income above the 2025 threshold must pay taxes. Wages from a part-time job are taxed under standard brackets, but do not trigger the Kiddie Tax.

How Much Can a Child Earn Tax-Free?

The first portion of unearned income ($1,250 in 2025) is tax-free due to the standard deduction. Income above this may be taxed at the child’s rate or the parents’ rate depending on the amount.

Other Considerations

• Children receiving SSI or other benefits may still need to file
  
  
• Parents can elect to include a child’s income on their return for simplicity
  
  
• Gifts to children must be tracked to avoid Kiddie Tax consequences

Bottom Line: Planning for Kiddie Tax in 2025

The Kiddie Tax 2025 applies to unearned income for children under 18 or full-time students under 24. Understanding thresholds, filing rules, and exemptions is essential for minimizing tax liability. Parents can use 529 plans, careful gifting, and timing of distributions to manage the tax impact.

Tax Planning Tips for Parents and Guardians

1. Use an unearned income tax calculator to estimate potential taxes
   
   
2. Take advantage of 529 or Coverdell plans to shelter earnings
   
   
3. Spread investment income over multiple years to stay below thresholds
   
   
4. Track UTMA and UGMA account income carefully
   
   
5. Consult a tax professional to coordinate Kiddie Tax planning with overall family income

Need Help Navigating the Kiddie Tax in New York or New Jersey?

Understanding the Kiddie Tax 2025, its thresholds, and reporting requirements can be complex for parents and guardians. GTA Accounting Group provides expert tax planning, bookkeeping, and advisory services to families in New York and New Jersey, helping you manage dependent unearned income, maximize exemptions, and ensure compliance with IRS rules.

Whether your child has a UTMA or UGMA account, receives dividends, or earns interest income, our team can guide you through recordkeeping, bookkeeping for minor accounts, filing IRS Form 8615, calculating potential tax liability, and minimizing the impact of the Kiddie Tax.

Plan ahead with GTA Accounting Group to protect your family’s finances, ensure accurate bookkeeping, and make sure your child’s income is reported correctly. Contact us today to discuss Kiddie Tax planning, dependent tax filing, bookkeeping support, and other tax strategies in New York and New Jersey.