Kiddie tax triggers and choosing the correct parent’s return

Kiddie tax rules can create unexpected filing and tax consequences when a child has unearned income, making it important for tax pros to understand when the rules apply and how to calculate the tax correctly. Common compliance challenges include identifying unearned income, determining which parent’s return to use and selecting between Forms 8615 and 8814.

What is the kiddie tax?

The kiddie tax is designed to prevent parents from shifting investment income to children to take advantage of the children’s lower tax rates. When the kiddie tax applies, the child still reports the income and pays the tax on the child’s own return. However, part of the child’s unearned income may be taxed using the parents’ marginal tax rate if that rate is higher.

For 2026, the kiddie tax may apply when a child has more than $2,700 of unearned income, is required to file a tax return, does not file a joint return and has at least one living parent at the end of the tax year. The child must also meet one of the age tests: the child was under age 18 at the end of the year; was age 18 and did not have earned income that was more than half of the child’s support; or was a full-time student at least age 19 but under age 24 and did not have earned income that was more than half of the child’s support.

What type of income qualifies?

Unearned income typically includes all income other than salaries, wages and other amounts received as pay for work performed. Examples include interest, dividends, capital gains, capital gain distributions, rents, royalties, pensions, annuities, taxable scholarships and grants not reported on Form W-2, unemployment compensation, alimony, taxable Social Security and income received as a beneficiary of a trust or estate.

Taxable scholarships and grants are also treated as unearned income for kiddie tax purposes unless they are reported on Form W-2. For example, if a student treats part of a scholarship as taxable so that the parents may claim the American opportunity tax credit (AOTC), the taxable portion of the scholarship may count as the child’s unearned income. If the child’s unearned income exceeds $2,700 and the other requirements are met, Form 8615, Tax for Certain Children Who Have Unearned Income, may be required. Section 117 is relevant to determining whether the scholarship is taxable.

Income from a UTMA or UGMA account belongs to the child, not the custodian. The custodian manages the account for the child’s benefit, but the income is generally reported under the child’s Social Security number. Income from these accounts may be subject to the kiddie tax if the child meets the applicable requirements.

Tax-free qualified tuition program (QTP or §529 plan) distributions are not income. However, a nonqualified distribution may contain taxable earnings, which must generally be reported as income and may be unearned income subject to the kiddie tax if the child is the recipient and all §1(g) requirements are satisfied. The beneficiary is generally treated as the recipient only when the distribution is paid directly to the beneficiary or to an eligible educational institution for the beneficiary; otherwise, the account owner is generally treated as the recipient. A taxable distribution may also be subject to the 10% additional tax, subject to exceptions. This rule may affect planning when families compare custodial accounts, such as UTMA or UGMA accounts, with §529 accounts for education savings.

Analyze the parent’s tax return

If the parents are married and live together but file separate returns, the return of the parent with the higher taxable income is used to compute the kiddie tax. The child’s net unearned income above the threshold is compared with the parents’ tax information, so the child’s tax can be figured using the parents’ marginal tax rate if that rate is higher.

The rules are different if parents are divorced or separated. Whose return to use depends on several factors. If the parents are divorced or legally separated, use the return of the custodial parent, the parent who had custody of the child for the greater part of the year, as long as the custodial parent has not remarried.

If the custodial parent has remarried, the stepparent is treated as the child’s other parent for this purpose. If the custodial parent and stepparent file a joint return, use the joint return. Do not use the noncustodial parent’s return. If the custodial parent and stepparent file separate returns, use the return of the spouse with the higher taxable income. If the parents were never married and lived together all year, use the return of the parent with the higher taxable income. If they did not live together for the entire year, apply the divorced or legally separated parent rules mentioned above.

However, if the parents are married to each other but not living together, use the custodial parent’s return only if the custodial parent is considered unmarried for tax purposes (head of household). If the custodial parent is not considered unmarried (married filing separately), use the return of the parent with the higher taxable income.

Which form to use?

Parents may be able to use Form 8814 when the child’s income consists only of interest, dividends, capital gain distributions and Alaska Permanent Fund dividends. The child must have no earned income, no capital gains or losses from sales, no rents, no royalties and no other disqualifying income. The child must also be required to file a return, cannot file jointly, cannot have made estimated tax payments and cannot have had federal income tax withheld.

The child must be under age 19 at the end of the year, or under age 24 if a full-time student, and the child’s gross income must be less than $13,500 for 2026. This election can simplify filing because the child may not need to file a separate return, but it may increase the family’s total tax because the child’s income is included in the parents’ adjusted gross income (AGI) and may affect limitations or phaseouts on the parents’ return.

Take the next step with Form 8615

A child’s unearned income can quickly complicate the family’s return. Build confidence choosing the right parent information and filing properly with NATP’s Understanding Kiddie Tax on Form 8615 webinar, live Sept. 24, 2026, or on demand.