The Kiddie Tax and Custodial Accounts

Under IRC §1(g), the Kiddie Tax dictates that unearned income exceeding $2,700 (for 2026) received by a child under age 19 (or under 24 if a full-time student) is taxed at the parent’s marginal tax rate. Unearned income includes interest, dividends, and capital gains.

The self-support escape hatch is narrower than it is usually described. Under IRC §1(g)(2)(A), a child is exempt from the kiddie tax if their earned income exceeds half of their own support — but that test is available only to a child who is 18, or a full-time student aged 19 to 23. A child under 18 is subject to the kiddie tax no matter how much they earn or how completely they support themselves; for them, age alone decides. The tax is reported on Form 8615, “Tax for Certain Children Who Have Unearned Income”, which is attached to the child’s Form 1040 and requires the parent’s Taxpayer Identification Number (TIN).

Parents can elect to report a child’s interest and dividends on their own return using Form 8814, “Parent’s Election to Report Child’s Interest and Dividends”. However, this election is financially disadvantageous in most scenarios:

1.

The middle tier is lost. Qualified dividends and capital-gain distributions keep their character on the parent’s return, but the second $1,350 — which on Form 8615 sits in the child’s own bracket, 0% for dividends and gains — is taxed at a flat 10% on Form 8814.

2.

The income increases the parent’s AGI, potentially triggering phase-outs of other deductions or the 3.8% Net Investment Income Tax (NIIT) under IRC §1411.

3.

Any realized capital gains reported on Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions” disqualify the child from this election, requiring a separate return.

Filing a separate return for the child using Form 8615 is the correct financial strategy in almost all cases. For California residents, a parallel state kiddie tax must be calculated and reported on Franchise Tax Board Form 3800, which applies the parents’ state tax bracket to the child’s excess unearned income.

When the child does not otherwise file: conversions and other retirement income. A Roth conversion in a minor’s name — most commonly out of a Trump Account after it becomes an IRA at 18 (section “Trump Child Savings Accounts”), or out of an inherited pre-tax account — raises a mechanical question worth settling before you execute one. The answer is that the child files their own return, and there is no alternative. The Form 8814 election covers only interest, ordinary dividends, and capital gain distributions; a Form 1099-R disqualifies it outright, so the income cannot be pulled onto the parents’ return even if the family would prefer it. The 1099-R is issued under the child’s Social Security number, the income is theirs, and a dependent who would otherwise have no filing obligation acquires one the moment unearned income crosses the threshold — $1,350 for 2026.

Being claimed as a dependent does not prevent filing; it shrinks the standard deduction. A dependent gets the greater of $1,350 or earned income plus $450, capped at the ordinary $16,100 single figure — so a child with a summer job and $6,000 of wages shelters $6,450, while a child whose only income is a conversion is stuck at the $1,350 floor. That produces a three-layer stack on converted gain: the first $1,350 absorbed by the standard deduction, the next $1,350 taxed at the child’s own 10% bracket, and everything above $2,700 taxed at the parents’ marginal rate on Form 8615.

Two filing details follow. The child’s return needs Form 8606 to report basis and compute the taxable share — for a Trump Account the family’s after-tax contributions are basis, so only the accumulated gain is income, and skipping the form invites the IRS to treat the entire conversion as taxable. And the parents’ own return has to be finished first, or at least their taxable income known, because Form 8615 requires it. Where the parents file separately, the rate used is that of the higher-income parent, which is one more reason to run this in a year the child is out from under IRC §1(g) entirely instead of optimizing inside it.