Kiddie tax basics tax pros can’t afford to miss

A child has taxable interest. A scholarship becomes partially taxable. A trust distribution lands in a child’s account. A capital gain shows up on the child’s return.

Suddenly, the “kiddie tax” is on the table.

The kiddie tax applies only when specific conditions are met, and one overlooked detail can completely change the outcome.

If you prepare returns for families, you’ll likely encounter these situations. While the rules may look straightforward, the execution rarely is.

Quick take for tax pros

• For 2025, Form 8615, Tax for Certain Children Who Have Unearned Income, may be required when a child has more than $2,700 of unearned income and the other conditions are met.
• The kiddie tax can apply whether or not the child is claimed as a dependent.
• At least one parent must be alive at the end of the tax year. If neither parent is alive at year-end, the kiddie tax does not apply.
• Unearned income can include taxable scholarships, trust income, pension and annuity income, capital gains, interest and dividends.
• Form 8814, Parents’ Election To Report Child’s Interest and Dividends, applies only when the child’s income is limited to interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends, and the other Form 8814 requirements are met.

The kiddie tax demystified

The kiddie tax was created to prevent income shifting. Congress did not want high-income parents transferring income-producing assets to children to benefit from lower rates.

But the rule has gatekeepers.

A child may be subject to the kiddie tax if all of the following apply:

1. The child has more than $2,700 of unearned income for the year.
2. The child is under 18, age 18 with earned income not exceeding half of support, or a full-time student age 19 through 23 with earned income not exceeding half of support. 
3. The child must file a return.
4. At least one parent is alive at the end of the tax year.
5. The child does not file jointly.

What counts as unearned income?

Unearned income is broader than many preparers realize.

It includes:

• Interest and dividends
• Capital gains
• Trust distributions
• Gambling winnings
• Taxable scholarship income not reported on Form W-2
• Certain K-1 items, depending on their character
• Pension and annuity income

Taxable scholarships are often confusing. They are treated as earned income for standard deduction purposes. However, for kiddie tax purposes, they are unearned income.

Gambling winnings create another planning layer. Losses may be deductible if the child itemizes. But only deductions directly connected to producing unearned income affect the Form 8615 calculation and miscellaneous itemized deductions remain suspended through 2025.

Form 8615 versus Form 8814

If the kiddie tax applies, the child attaches Form 8615 to their return. The form calculates how much of the child’s net unearned income is taxed at the parent’s marginal rate.

Form 8814 allows parents to report certain income on their own return. But it is limited to interest and dividends, including capital gain distributions. Once other income types appear, such as taxable scholarships or gambling winnings, that option disappears. Assuming Form 8814 is available is a common mistake.

Key kiddie tax considerations

The kiddie tax is not just a threshold test. It is a coordination exercise.

You must confirm whether:

• The child is required to file a return
• The child has unearned income for Form 8615 purposes
• The child meets the age, student and earned-income support tests
• At least one parent is alive at year-end
• The child is not filing a joint return
• Adoption or stepchild status affects the parent analysis
• Itemizing affects the Form 8615 Line 2 calculation
• Form 8814 is available instead of a separate child return

This is also where clear client communication enters the picture. When a child’s income is taxed at the parent’s higher rate, families often assume something may be wrong. Being able to walk through the statutory structure builds trust.

Mastering Form 8615 mechanics

Kiddie tax issues can arise with inherited IRAs, legal settlements, education planning, investment accounts and unexpected windfalls.

It is technical.

And it can materially affect family tax liability.

Knowing when Form 8615 is required and how to apply it correctly protects both your clients and your credibility.

If you want to work through real return scenarios and calculation mechanics step by step, NATP’s upcoming Understanding Kiddie Tax on Form 8615 webinar walks through the application in detail. Available live on June 2 or on demand, the course is designed to help you move from conceptual understanding to confident execution.