· Listen
A grandparent invests $100,000 in a UTMA for a 12-year-old. The fund pays 2% in dividends, so the account throws off $2,000 in unearned income per year. That single number triggers the kiddie-tax mechanic. This lesson explains what happens to that $2,000, why, and how the numbers actually settle out at tax time.
The simple version
The kiddie tax is a rule that taxes a child's unearned income above a yearly threshold at the parents' marginal tax rate, not the child's. It exists so families cannot shift large amounts of investment income to a child to get a lower tax rate.
It applies only to unearned income: interest, dividends, and realized capital gains. It does not apply to wages, salaries, or self-employment income a kid earns from working. A teen with a summer-job paycheck is taxed at the child's normal rate on those wages, not the parents' rate.
The 2026 thresholds
Per IRS Revenue Procedure 2025-32 Section 4.02:
- First $1,350 of unearned income: offset by the child's standard deduction (effectively 0% federal tax).
- Next $1,350 (income from $1,350 to $2,700 total): taxed at the child's own marginal rate.
- Unearned income above $2,700: taxed at the parents' marginal tax rate, reported on IRS Form 8615 and attached to the child's return.
Worked example, $4,000 of dividends in 2026
A 12-year-old has $4,000 of dividends in a UTMA during 2026. The kiddie-tax math breaks the $4,000 into three buckets:
- First $1,350: offset by the standard deduction. Federal tax: $0.
- Next $1,350 ($1,350 to $2,700): taxed at the child's marginal rate. If the child has no other income, the child's bracket is 10%, so federal tax: $135.
- Remaining $1,300 (above $2,700): taxed at the parents' marginal rate. If the parents are in the 24% bracket, federal tax: $312.
- Total federal tax on the $4,000: $447 (about an 11.2% effective federal rate). Roughly the parents' rate on the part above the threshold; not the child's flat 10%.
Form 8615 is the document that does this calculation and attaches the kiddie-tax-eligible portion to the child's return. Some families elect to report the child's investment income directly on the parents' return via Form 8814; that election has limits (only certain dollar amounts and only interest, dividends, and capital gain distributions, not realized gains from sales) and is not always advantageous.
Who the kiddie tax applies to
Per the IRS instructions, the kiddie tax applies to any child:
- Under age 18 at the end of the year, OR
- Age 18 and earned income did not exceed half of their support, OR
- Age 19 to 23, a full-time student, and earned income did not exceed half of their support.
A college student under 24 with a UTMA and limited earned income is still in kiddie-tax territory. A 19-year-old who is not a full-time student and earns enough to cover half of their own support is not.
The Real Cost lens
A UTMA invested in a broad-market stock fund typically yields about 1.5% to 2.5% in dividends. At a 2% yield, a balance under roughly $67,500 stays below the $1,350 first threshold (no federal tax on dividends). A balance from $67,500 to $135,000 sits in the second band (child's rate). Above roughly $135,000, the parents' rate kicks in on the marginal income above $2,700.
These are dividend-only thresholds. Realized capital gains from selling appreciated positions stack on top and can push the account into the parents' bracket much faster. Buy-and-hold positions (which avoid realizing gains) push the threshold higher in practice.
What this lesson is NOT
This is not personalized tax advice or a recommendation to file Form 8615 versus Form 8814. The right form depends on the family's specific income mix and bracket. A CPA earns their fee on this decision for families with non-trivial UTMA balances.
It is not a recommendation about whether to use a UTMA at all. The kiddie tax is one input, not the whole picture. Account flexibility, control at age of majority, and aid impact also matter; see the 'Saving for kids' pillar lesson for the full trade-off list.
It is not a state-tax explainer. State income tax treatment of a child's unearned income varies. This lesson covers federal mechanics only.
It is not legal advice. The application of the kiddie tax to specific account structures (trusts, gifted appreciated securities, etc.) can get complex and is well outside the scope of an educational explainer.
Related on this site
- Pillar lesson: Saving money for your kids: the actual options.
- Comparison lesson: 529 vs UTMA: the actual differences.
- Tools: Kiddie Tax Estimator (2026 bands), The 18th Birthday Reveal, and Which Account Fits worksheet.
- Glossary: Kiddie Tax, UTMA / UGMA, 529 Plan, Custodial Account, and Gift Tax.