The "kiddie tax" can apply long after childhood

TL;DR: The kiddie tax taxes a child's unearned income above $2,700 (for 2026) at the parent's higher tax rate. It applies to children under 18, 18-year-olds who don't support themselves, and full-time students up to age 23—making it a tax issue that can follow families well into a child's college years.

Many parents assume the "kiddie tax" stops being relevant once their child blows out the candles on their 18th birthday cake. Not quite. This tax can follow your family for years beyond that—and if you're not prepared for it, it can quietly inflate your overall tax bill.

Here's what you need to know.

What is the kiddie tax, and why does it exist?

The kiddie tax was designed to close a tax-planning loophole. Before it existed, parents could transfer income-producing assets—like stocks or bonds—into their children's names, shifting investment income into a lower tax bracket and reducing the family's overall tax liability.

The kiddie tax puts a stop to that strategy. When it applies, most of a child's unearned income gets taxed at the parent's rate instead of the child's.

Who does the kiddie tax actually apply to?

The kiddie tax generally applies to individuals who, at the end of the tax year, fall into one of these categories:

• Under age 18
• Age 18, unless they provide more than half of their own support from earned income
• Ages 19–23 and enrolled as full-time students, unless they provide more than half of their own support from earned income

That last group is the one that surprises most families. A 22-year-old college junior who receives dividends from a custodial account set up by their grandparents? Potentially subject to the kiddie tax. The exposure doesn't end until the year the student turns 24.

How does the kiddie tax work in 2026?

Earned income—wages, freelance pay, tips—is never subject to the kiddie tax. The tax only applies to unearned income, which typically includes interest, dividends, and capital gains.

For 2026, the rules break down as follows:

• The first $1,350 of unearned income: taxed at 0%
• The second $1,350: taxed at the child's own rate (which could also be 0%, depending on the income type and the child's total taxable income)
• Anything above $2,700: taxed at the parent's rate

That parent's rate can reach up to 37% on interest and short-term capital gains, or up to 20% on long-term capital gains and qualified dividends—depending on the parent's taxable income.

For 2026, Form 8615 ("Tax for Certain Children Who Have Unearned Income") must be filed if your child has more than $2,700 in unearned income and meets the age and support criteria above.

One more detail worth noting: the kiddie tax threshold adjusts for inflation, but only in increments of at least $100. It did not increase for 2026, making an increase for 2027 more likely.

What can families do to reduce kiddie tax exposure?

The good news—there are planning opportunities worth exploring.

One approach is reviewing the types of investments held in custodial accounts. Growth-oriented investments that generate little current income can reduce unearned income in the near term. Once your child reaches the age where the kiddie tax no longer applies, appreciated investments can be sold, with gains taxed at your child's own—potentially much lower—rate.

The key is timing and asset selection. Not every investment strategy is a good fit for a custodial account, and the kiddie tax is one reason why.

Get ahead of your family's tax picture

The kiddie tax is one of those rules that catches families off guard because it feels like it shouldn't apply anymore. But the numbers don't lie, and neither do the filing requirements.

At SD Mayer, we help families assess their kiddie tax exposure and build investment strategies that make sense for their specific situation. If you have children with unearned income—whether they're in high school or finishing up their last year of college—it's worth having a conversation before tax season arrives.

Reach out to our team today and let's take a closer look at your family's tax picture.

Frequently asked questions

Does the kiddie tax apply to college students?
Yes. Full-time students between ages 19 and 23 are subject to the kiddie tax on unearned income above $2,700 (for 2026), unless they provide more than half of their own support from earned income.

What income is subject to the kiddie tax?
Only unearned income—such as interest, dividends, and capital gains—is subject to the kiddie tax. Earned income from a job or self-employment is never included.

At what age does the kiddie tax stop applying?
The kiddie tax stops applying in the year a full-time student turns 24. From that year forward, even students supported by their parents are exempt.

What is the kiddie tax threshold for 2026?
For 2026, the kiddie tax applies to unearned income above $2,700. The threshold is adjusted annually for inflation, but only in increments of at least $100.

How can families reduce their kiddie tax liability?
One strategy is to hold growth-oriented investments in custodial accounts that generate little current income, deferring gains until the child is no longer subject to the kiddie tax. A tax advisor can help identify the right approach for your situation.