The idea is appealing: move investments into a child's name, and the income is taxed at their rate rather than yours. A child with no other income pays little or nothing, and the family saves.
That worked once. The kiddie tax was introduced specifically to close it, and it has been broadened repeatedly since. Above a fairly modest amount, a child's investment income is taxed at their parents' rate — which removes the arbitrage entirely.
What changed in 2026
- Thresholds continued adjusting with inflation, which moves the numbers annually without changing the structure.
- The parents' rate remained the basis. After a brief period when the rules used trust rates instead — producing worse outcomes for some families — the calculation reverted and has stayed there.
- 529 plans kept gaining ground. Their exemption from this, plus expanded qualified uses, widened the gap against custodial accounts for education saving.
- Investment app adoption raised the profile. More families opened custodial accounts through consumer apps and encountered the rule without having planned for it.
How it works
A child's income splits into two categories with different treatment.
Earned income — wages from a job — is taxed at the child's own rate. Always. A teenager earning from a summer job pays their own low rate on it, and the kiddie tax does not touch it.
Unearned income — interest, dividends, capital gains — is where the rule applies. Broadly, a first tranche is covered by the child's standard deduction, a second tranche is taxed at the child's rate, and anything above that is taxed at the parents' marginal rate.
The specific amounts adjust annually and the structure holds: a modest amount at favourable rates, then your rate.
| Income type |
Whose rate |
| Wages from a job |
Child's |
| Interest and dividends, first tranche |
Untaxed |
| Interest and dividends, second tranche |
Child's |
| Interest and dividends above that |
Parents' |
| Capital gains above the tranches |
Parents' |
The ages catch people
It is called the kiddie tax and it does not stop at childhood.
It applies to children under 18, to 18-year-olds whose earned income does not exceed half their support, and to full-time students aged 19 to 23 under the same support test.
That student clause is the one that surprises families. A 22-year-old university student with a custodial account generating meaningful investment income is still taxed at their parents' rate. The account was opened when they were seven on the assumption it would be theirs, and taxed as theirs, long before now.
The support test provides an exit: a student whose own earned income covers more than half their support is no longer subject to it. That is a high bar for most full-time students.
Custodial accounts versus 529 plans
This is where the rule has practical consequences, because it is the main tax distinction between the two common ways of saving for a child.
A custodial account (UTMA or UGMA) holds assets in the child's name with an adult as custodian. The income is the child's income, and above the thresholds it is subject to the kiddie tax. The money can be used for anything, and it becomes the child's outright at the age of majority — legally theirs, to do whatever they choose with.
A 529 plan grows tax-free and is withdrawn tax-free for qualified education expenses. No annual income to report, so no kiddie tax at all. The account owner — usually the parent — retains control, including the ability to change the beneficiary.
For education saving specifically, the 529 is generally the stronger choice on both tax treatment and control. Custodial accounts make sense when you want flexibility beyond education and are comfortable handing over control at majority — see UTMA vs 529 for the fuller comparison.
Common mistakes
- Assuming income shifting still works. It was closed decades ago and broadened since.
- Forgetting the student ages. A 21-year-old with a custodial account is frequently still caught.
- Not filing when required. A child with unearned income above the threshold generally needs a return, or the amount can be reported on the parents' return where eligible.
- Realising large gains in a custodial account. Selling appreciated holdings in one year can trigger a substantial bill at your rate.
- Overlooking financial aid treatment. Custodial accounts are the student's asset and are assessed more heavily than a parent-owned 529.
- Forgetting the account becomes theirs. At majority, control transfers irrevocably.
FAQ
Does a summer job trigger it?
No. Earned income is taxed at the child's own rate regardless of amount. A working teenager is unaffected by this rule on their wages.
Can I avoid it by keeping income low?
Yes, within limits. Growth-oriented holdings that pay little income and are not sold generate little to tax, which is one reason index funds in custodial accounts are less problematic than income-producing assets — see best index funds. The gain arrives eventually when sold.
What about a Roth IRA for a child?
A genuinely good option where a child has earned income. Contributions are limited to earned income, growth is tax-free, and there is no kiddie tax issue since there is no annual reportable income.
Does it apply to a 529?
No — that is the point of the comparison. No annual income to report means nothing for the rule to apply to.
Where to go next
For the account comparison this most affects, read UTMA vs 529. For education account rules generally, 529 plan withdrawal rules, and for accelerated funding, 529 superfunding.
This is general information, not tax advice. Thresholds adjust annually and the support tests are specific; confirm current rules with the IRS or a qualified preparer.