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The Kiddie Tax in 2026: How Your Child’s UTMA and Brokerage Income Is Taxed

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

The kiddie tax taxes a child’s investment income above $2,700 at the parents’ tax rate for 2026. The first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate, and everything above $2,700 is taxed as if the parents earned it (IRS Rev. Proc. 2025-32, section 4.02). The child reports it on Form 8615, attached to the child’s own return.

For a family earning $750,000 to $3 million, that last tier is the one that matters. It means a UTMA or kids’ brokerage account is taxed at 35% or 37% federal on ordinary income (typically 20% on long-term gains and qualified dividends) once it throws off more than $2,700 a year, plus California’s rate if you live there. This guide covers who the rule applies to, a worked example for a California and a Washington family, the choice between Form 8615 and reporting the income on your own return, and the few moves that keep a child’s account efficient.

What the kiddie tax is, in one table

Congress added the kiddie tax to stop parents in high brackets from shifting investments into their children’s names to use the children’s low brackets. The income still belongs to the child, and the child still files. The rule only changes the rate on the top slice.

Tier (2026) Child’s unearned income Rate applied
1 First $1,350 0% (covered by the child’s standard deduction)
2 $1,350 to $2,700 The child’s own rate (10% on ordinary income, often 0% on long-term gains and qualified dividends)
3 Above $2,700 The parents’ marginal rate, if higher than the child’s

Sources: $1,350 and $2,700 from Rev. Proc. 2025-32 (sections 4.02 and 4.14) and the Form 8615 instructions. A dependent child with only investment income gets a $1,350 standard deduction for 2026, which is why the first tier is tax-free.

“Unearned income” means everything that is not pay for work: taxable interest, dividends, capital gains (including mutual fund capital gain distributions), rents and royalties. Wages from a real job are earned income and are never subject to the kiddie tax.

Who the kiddie tax applies to: age, student status and support

Form 8615 is required when all of these are true for the year (Form 8615 instructions):

For families with children under 12, the practical answer is simple: every child in the house is covered, and will be for years. The rule applies whether or not you claim the child as a dependent, and it applies to money that came from grandparents just as much as money that came from you.

When parents file jointly, the child’s Form 8615 uses the joint return. If parents file separately, it uses the return of the parent with the higher taxable income. That creates a timing issue that catches busy families: the child’s return cannot be finished until the parents’ taxable income is known.

Worked example: a $150,000 UTMA in California and Washington

Assumptions (illustrative, not a forecast):

The math follows Form 8615: taxable income is $6,000 minus the $1,350 standard deduction, or $4,650. Net unearned income is $6,000 minus $2,700, or $3,300, taxed at the parents’ rate. The remaining $1,350 is taxed at the child’s rate.

Federal tax, 2026 Scenario A: gains and qualified dividends Scenario B: ordinary income
Tier 1: first $1,350 $0 $0
Tier 2: next $1,350 at the child’s rate $0 (0% long-term gain rate) $135 (10%)
Tier 3: $3,300 at the parents’ rate $660 (20%) $1,221 (37%)
Total federal $660 $1,356
Effective federal rate on $6,000 11% 22.6%

The same account, earning the same $6,000, owes about twice as much federal tax when the income is ordinary. That gap comes from what the account holds and how often it trades, which is a decision the family controls.

The child also owes no Net Investment Income Tax. NIIT is 3.8%, but on a child’s own return it is measured against the child’s modified adjusted gross income and the $200,000 single threshold (IRS NIIT page). A child with $6,000 of income is nowhere near it. Keep that in mind for the Form 8814 comparison below.

If the family lives in California

California has its own kiddie tax. Children with more than $2,700 of unearned income (2025, the latest form published) file FTB Form 3800, which taxes the excess at the parent’s California rate (FTB 3800 (2025)). California also has no lower rate for capital gains (FTB capital gains page), so Scenario A and Scenario B are taxed the same at the state level.

At $950,000 of California taxable income, the parents sit in the 11.3% bracket ($891,542 to $1,485,906 for joint filers on the 2025 schedule; FTB has not posted 2026 schedules yet). California tax on the $3,300 excess is about $373 ($3,300 x 11.3%). The child’s own California tax on the first $2,700 is small and left out here. The separate 1% Behavioral Health Services Tax that applies to taxable income above $1 million is not part of this calculation: FTB 3800 uses the parent’s regular tax from Form 540, line 31.

Total for the California family: roughly $1,033 in Scenario A ($660 + $373) and $1,729 in Scenario B ($1,356 + $373).

If the family lives in Washington

The federal tax is identical. Washington has no individual income tax for 2026 (WA DOR), so there is no state kiddie tax. Washington’s 7% capital gains tax applies only to long-term gains above a large standard deduction ($278,000 for 2025, the latest amount published by WA DOR), which a child’s account will not reach. Total for the Washington family: $660 in Scenario A and $1,356 in Scenario B.

One caveat for high earners: Washington enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028 (SB 6346, WA DOR). A child’s small account will not cross that line, but parents who elect to put a child’s income on their own return should watch for guidance on how that tax defines income.

Form 8615 or Form 8814: file for the child, or put it on your return

Parents can sometimes skip the child’s return and report the child’s income on their own return with Form 8814 (California’s version is FTB 3803). It is only allowed when all of these hold (Form 8814 instructions):

It saves a return. For a high-income household it usually costs money, for three reasons the IRS itself lists:

  1. The middle tier is taxed at 10%. On Form 8814, income between $1,350 and $2,700 is taxed at 10%, up to $135. On the child’s own return, qualified dividends in that tier can be taxed at 0%.
  2. The income becomes the parents’ for NIIT. The amount added to the parents’ return counts toward their modified adjusted gross income and net investment income. At this income level that adds 3.8%.
  3. Higher AGI. The extra income raises the parents’ AGI, which can reduce other deductions and credits.

Take Scenario A again, but assume the $6,000 is all qualified dividends so that Form 8814 is allowed. On Form 8814, the parents pay $135 on the middle tier, $660 on the $3,300 excess (20%) and $125 of NIIT ($3,300 x 3.8%), about $920 in total. Filed on Form 8615 in the child’s name, the same income costs $660. The separate return costs roughly $260 less before preparation fees. The IRS instructions suggest figuring both ways and comparing, which is what a good preparer does each year.

UTMA tax rules: who pays, whose SSN, and which returns

A UTMA account belongs to the child from the day the gift is made. The practical rules that follow:

Money in a UTMA is meant to be spent for the child’s benefit. Using it for basic support the parents already owe the child is a common trouble spot, so check with a preparer before doing it. The rules for taking money out are covered in UTMA withdrawal tax rules.

Ways to keep a child’s account under the kiddie tax threshold

At a 2% dividend yield (an assumption), a $135,000 account produces $2,700 of dividends before any sale. Most families with a funded UTMA will cross the line. The goal is not to avoid the tax at any cost, but to stop paying 37% on income that did not need to exist.

  1. Hold growth, not income. A low-turnover, broad index fund or ETF produces mostly qualified dividends and few capital gain distributions. Bonds, money market funds and active funds in a child’s account create ordinary income at the parents’ rate.
  2. Harvest gains into the low tiers. In a year when dividends leave room below $2,700, selling shares with long-term gains up to that line can reset cost basis at a 0% federal rate. California still taxes the gain as ordinary income, at the child’s low rate.
  3. Put education money in a 529 instead. A 529 is not subject to the kiddie tax at all, because earnings are not taxed each year and qualified withdrawals are tax-free. Grandparents and parents can front-load up to $95,000 per donor per child for 2026 with the five-year election. California gives no deduction for contributions, but growth is still sheltered. See 529 vs UTMA vs custodial Roth.
  4. Use a custodial Roth when the child has real earnings. Contributions are capped at the lesser of the child’s earned income or $7,500 for 2026, and qualified withdrawals are tax-free. See custodial Roth IRA for kids.
  5. Stop adding to the UTMA once it is large enough. A UTMA’s real advantage is flexibility, and its real cost is that the child gets control at 18 or 21. Past a certain size, new gifts often belong in a 529 or, for larger amounts, a trust drafted by an estate attorney.

Common kiddie tax mistakes in high-income households

What to write down for your kids about this account

The kiddie tax is a one-page rule. What your child will actually need at 18 or 21 is the reasoning: why the account exists, who funded it, what it was for, why it holds what it holds, and what you hoped they would do with it. A short note filed with the statements each year does that. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” In the FamilyKnowledge® Library, this sits next to the 529 and the estate plan, so the child sees all three decisions together. More on why we start this early is on the Age Five Wealth Education page.

Kiddie tax questions parents ask

Does the kiddie tax apply to a 529 plan?

No. A 529’s earnings are not taxed each year, so there is no annual unearned income to report. Qualified withdrawals for education are federal and California tax-free. Non-qualified withdrawals are taxed on the earnings and usually carry an additional federal tax (IRS Pub. 970), which is why the 529 is usually the better home for money clearly meant for school.

Is a child’s wage income subject to the kiddie tax?

No. The kiddie tax applies only to unearned income. Wages for real work are taxed at the child’s own rates, and earned income can also fund a custodial Roth IRA. An allowance or a gift is not earned income (IRS Pub. 590-A). For an 18-year-old or college student, earned income above half of their support can end the kiddie tax early.

Do grandparents’ gifts count?

Yes. The kiddie tax looks at the child’s investment income, not at who gave the money. A UTMA funded by grandparents is treated exactly like one funded by parents, and the tax is still figured at the parents’ rate.

Next step

Pull last year’s 1099 for each child’s account and check two numbers: total unearned income against $2,700, and how much of it was ordinary income. If either surprises you, that is the conversation to have with your preparer before year end. If you want the kids’ accounts, the 529s and your own equity compensation reviewed together, the Tax & Wealth Assessment from Bright Advisers, an Age Five Family Office™, is where that starts. See also our tax management service.

This page is general education, not individual tax advice, and the right move depends on your family’s full picture.