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 age 24 if a full-time student) is taxed at the parent’s marginal tax rate. Unearned income includes interest, dividends, and capital gains.

The Kiddie Tax does not apply if the child’s earned income exceeds half of their own support. 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 child’s qualified dividends and capital gains are taxed at the parent’s marginal rate, forfeiting the child’s individual 0% capital gains bracket.

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 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.