Kiddie Tax Calculator

The kiddie tax looks complicated and is not. A single indexed figure — $1,350 for 2026 — does all the work, and section 1(g) subtracts it from unearned income twice.

The first subtraction is the dependent standard deduction under section 63(c)(5)(A), which shelters the first $1,350 outright. The second is the allowance in section 1(g)(4), which leaves the next $1,350 to be taxed at the child's own rates. Everything above $2,700 becomes net unearned income and is taxed at the parents' marginal rate.

That is the whole mechanism. The rule exists because without it a high-rate parent could park an investment portfolio in a child's name and have the income taxed at 10%. Congress closed that in 1986, and the shape has been stable since — only the dollar figure moves.

A UTMA or UGMA account is genuinely tax-efficient while it produces less than $2,700 a year of income. Above that it is taxed as though the money were the parents', which removes the entire point of the arrangement while keeping all of its disadvantages.

And those disadvantages are real. A custodial account is an irrevocable gift: the money belongs to the child, and at the age of majority they take control of it and can spend it on whatever they like. It also counts as the student's asset for federal financial aid, which is assessed far more harshly than a parent's asset.

A 529 avoids all of this. Growth is not taxed at all when used for qualified education expenses, so the kiddie tax never arises; the parent stays in control; and it is treated as a parental asset for aid purposes. For education saving specifically, the comparison is not close.

Where a custodial account still makes sense is for a modest amount intended as an outright gift, kept below the annual threshold — or for a child with earned income, since wages raise the standard deduction and shelter more of the investment income alongside.

The rule applies automatically to any child under 18. Most people know that. Fewer know that it continues to apply to a full-time student under 24 who does not provide more than half of their own support.

That means a college fund in a student's name is squarely inside the kiddie tax throughout their degree — exactly the period when it is most likely to be sold to pay tuition, and exactly when large capital gains are most likely to be realised.

The support test is the escape route, and it is a genuine one: a student who earns enough to provide over half their own support is out of the rule entirely and taxed at their own rates. So is any child aged 18 who is not a student. The year a child ages out is frequently the right year to realise accumulated gains, and the difference can be substantial.

One point of relief worth knowing: long-term capital gains keep their preferential character even when pushed to the parents' rate. Gains taxed under the kiddie tax use the parents' capital gains rate — 15% or 20% — not their ordinary rate, so the penalty on a portfolio of appreciated stock is smaller than on a portfolio of bond interest.