What are the kiddie tax thresholds for 2025?

For 2025, the first $1,300 of a child's unearned income is tax-free. The next $1,300 is taxed at the child's rate (typically 10%). Any unearned income above $2,600 is taxed at the parent's marginal tax rate. These thresholds are adjusted annually for inflation.

At what age does the kiddie tax stop applying?

The kiddie tax applies to children under age 19, or under age 24 if they are full-time students and do not provide more than half of their own support. Once the child exceeds these age limits, their investment income is taxed at their own rate.

Is a 529 plan better than a UTMA for college savings?

Generally yes, for tax purposes. 529 plan growth is completely tax-free when used for qualified education expenses, and the account has minimal impact on financial aid. UTMA gains above $2,600 are taxed at the parent's rate, and the account counts at 20% for FAFSA (versus 5.6% for parental assets).

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The 'Kiddie Tax': Rules for Investing in Your Child's Name

Thinking of shifting income to your kids to save taxes? The IRS thought of that in 1986. Learn the limits of UTMAs and Custodial Accounts.

Last updated on March 10, 2026

It’s a classic idea: “I’ll put the stock in my 5-year-old’s name. He has no income, so his tax rate is 0%!” Enter the Kiddie Tax. The IRS prevents parents from using children as tax shelters.

Key Takeaways

First ~$1,300 of unearned income (dividends/interest): Tax-Free.
Next ~$1,300: Taxed at the *Child's* rate (usually 10%).
Anything Over ~$2,600: Taxed at the **Parent's Marginal Rate**.
Solution: Use 529 Plans (Tax-Free) or Roth IRAs for Kids (Tax-Free) instead of standard brokerage accounts.

The Trap: Capital Gains

If you open a UTMA (Uniform Transfers to Minors Act) account and buy Apple stock. The stock doubles. You sell it to pay for college. Gain: $20,000.

The first small chunk is cheap.
The remaining $17,000+ is taxed at your high tax rate (probably 15% or 20% + NIIT).
Worse: This asset counts heavily against FAFSA financial aid (20% assessment rate vs 5.6% for parental assets).

Understanding the difference between capital gains and ordinary income rates matters here. Even at the parent’s rate, long-term capital gains (15-20%) are better than ordinary income rates (up to 37%). But you still lose the benefit of the child’s lower bracket on anything above the kiddie tax threshold.

Better Alternatives: 529 Plans

A 529 plan avoids the kiddie tax entirely. Growth is tax-free when used for qualified education expenses, contributions may be state-tax deductible, and the account has a much smaller impact on financial aid. For college savings specifically, a 529 is almost always the better vehicle than a UTMA. And thanks to SECURE 2.0, unused 529 funds can now be rolled into a Roth IRA for the beneficiary.

Also be aware of the gift tax limits. In 2025, you can give up to $19,000 per child ($38,000 if married) without filing a gift tax return. 529 plans offer a special “superfunding” rule that lets you front-load 5 years of gifts at once.

The Loophole: Earned Income

The Kiddie Tax applies to Unearned Income. If you own a business and hire your child (legitimately) to sweep floors or model for photos:

That is Earned Income.
Tax rate: 0% up to the Standard Deduction (~$15,000 in 2025).
And they can put it in a Roth IRA.

This is one of the most effective tax strategies for high-income families. The child earns income tax-free, contributes to a Roth IRA that grows tax-free for decades, and you get a business deduction for reasonable wages paid. See our full guide on hiring your children for tax savings for the rules and limits.

Work beats Gifts.

How sharper.tax Helps

sharper.tax analyzes your family’s uploaded return and identifies whether investment income in custodial accounts is triggering the kiddie tax at your marginal rate. We quantify how much you could save by shifting those assets to a 529 or by restructuring how your children earn income. Sophisticated tax planning used to require a high-end CPA --- we make it available for free.

Sources

The information above is educational and not tax advice.