Introduction: What Are Kiddie Tax Rules for Investment Income?
In 2025, the Kiddie Tax rules for investment income continue to apply. These rules affect children who earn unearned income, such as interest, dividends, or capital gains. The Kiddie Tax limits the ability of parents to shift income to their children to take advantage of lower tax rates. This article will explain how the Kiddie Tax works, who it applies to, and how you can minimize its impact on your child’s investment income.
What is Kiddie Tax?
The Kiddie Tax applies to children who earn unearned income, such as money from investments. Instead of being taxed at the child’s lower tax rate, the unearned income is taxed at the parent’s higher tax rate if it exceeds a certain threshold. This rule was created to prevent parents from shifting income to children to avoid higher taxes.
In 2025, the Kiddie Tax applies to children under age 19 or under age 24 if they are full-time students. If the child’s unearned income exceeds $2,300, the income above that amount will be taxed at the parent’s rate.
Who Does the Kiddie Tax Affect?
The Kiddie Tax rules affect children under 19 or under 24 if they are full-time students. For 2025, the tax applies when a child’s unearned income exceeds $2,300.
If your child’s unearned income is below the $2,300 threshold, the Kiddie Tax does not apply. Only unearned income is taxed this way, so income from a part-time job is not affected by the Kiddie Tax.
For more information on tax rates, check out this IRS page on the Kiddie Tax.
How the Kiddie Tax Works in 2025
The Kiddie Tax in 2025 works as follows:
- Unearned Income: The IRS considers investment income (such as dividends and interest) as unearned income.
- Threshold for Kiddie Tax: If your child’s unearned income exceeds $2,300, the amount above that will be taxed at the parent’s tax rate.
- Tax Brackets: Once the threshold is exceeded, the extra income is taxed at the parent’s tax rate. This can increase your tax burden significantly.
For example, if your child has $3,000 in unearned income, the first $2,300 is taxed at the child’s tax rate. The remaining $700 will be taxed at the parent’s rate.
How to Minimize the Kiddie Tax Impact
To reduce the impact of the Kiddie Tax, consider the following strategies:
- Gift Assets: You can gift assets to your child, but keep in mind the Kiddie Tax still applies if their unearned income exceeds $2,300. Gifting assets can help, but it won’t eliminate the tax.
- Tax-Advantaged Accounts: Use accounts such as a 529 college savings plan or custodial IRAs. These accounts may offer tax benefits and reduce your child’s taxable income.
- Choose Tax-Efficient Investments: Tax-efficient investments like municipal bonds or index funds may help lower your child’s taxable income. These types of investments generally generate less taxable income, which can help avoid triggering the Kiddie Tax.
For more on tax-efficient investing, read our guide on tax-saving strategies.
Filing the Kiddie Tax in 2025
If your child’s unearned income exceeds $2,300, you will need to file IRS Form 8615. This form calculates how much of the child’s income is taxed at the parent’s rate.
Make sure to attach Form 8615 to your child’s tax return. If you are unsure about how to file, consult with a tax professional to ensure everything is completed correctly.
Conclusion: Navigating the Kiddie Tax in 2025
In 2025, the Kiddie Tax still applies to children under 19 or under 24 if they are full-time students. If your child’s unearned income exceeds $2,300, the Kiddie Tax will apply. To reduce the impact of the Kiddie Tax, consider gifting assets, using tax-advantaged accounts, or investing in tax-efficient options.
By planning ahead, you can help minimize your child’s tax burden while staying compliant with tax laws.
