Kiddie Tax Rules 2025: Thresholds, Rates & How to Calculate
The kiddie tax rules for 2025 tax children's unearned income above $2,700 at their parent's marginal tax rate. The first $1,350 is tax-free, the next $1,350 is taxed at the child's rate, and anything above $2,700 triggers the parent's higher rate.
π‘ Key Takeaways
- For 2025, the kiddie tax threshold is $2,700 of unearned income β up from $2,600 in 2024
- The first $1,350 is tax-free; the next $1,350 is taxed at the child's rate
- Applies to children under 18, or under 24 if full-time students whose earned income doesn't exceed half their support
- Filed on Form 8615 (child's return) or Form 8814 (parent's return) depending on eligibility
- This is a heavily tested topic on the Enrolled Agent (EA) exam Part 1
Table of Contents
What Is the Kiddie Tax?
The kiddie tax is a federal tax provision that taxes a child's unearned income above a certain threshold at the parent's marginal tax rate instead of the child's lower rate. It was introduced in 1986 to prevent parents from shifting investment income to their children to take advantage of lower tax brackets.
Unearned income includes interest, dividends, capital gains, rents, royalties, and certain trust distributions. Wages and salaries from a job are not subject to the kiddie tax β earned income is always taxed at the child's own rate.
The kiddie tax applies once a dependent child's unearned income exceeds $2,700 for the 2025 tax year. β IRS Topic No. 553, 2025
The Tax Cuts and Jobs Act (TCJA) of 2017 briefly changed the kiddie tax to use trust and estate tax rates, but the SECURE Act of 2019 reverted it back to the parent's marginal rate β retroactively for 2018 and 2019. For 2020 onwards, the pre-TCJA rules apply. If you're preparing for the EA exam Part 1, understanding this legislative history is important.
Kiddie Tax Thresholds and Rates: 2024 vs 2025
The IRS adjusts kiddie tax thresholds annually for inflation. For 2025, the unearned income threshold rose to $2,700, up from $2,600 in 2024. Here is a side-by-side comparison of the key figures that tax professionals and EA exam candidates need to know.
| Category | 2024 | 2025 |
|---|---|---|
| Tax-free unearned income (standard deduction) | $1,300 | $1,350 |
| Taxed at child's rate | Next $1,300 | Next $1,350 |
| Taxed at parent's marginal rate | Above $2,600 | Above $2,700 |
| Dependent standard deduction (no earned income) | $1,300 | $1,350 |
| Dependent standard deduction (with earned income) | Greater of $1,300 or $450 + earned income | Greater of $1,350 or $450 + earned income |
β Pro Tip: The $450 figure used in the dependent standard deduction calculation is a fixed amount that does not change with inflation. Only the minimum floor ($1,350 for 2025) gets adjusted annually.
Who Is Subject to the Kiddie Tax?
The kiddie tax applies when a child meets all five conditions set by the IRS. Understanding who qualifies is essential for accurate tax filing and is frequently tested on the Enrolled Agent exam. A child must file Form 8615 if every one of the following conditions is met.
- The child had more than $2,700 of unearned income in 2025
- The child is required to file a tax return
- The child meets one of these age tests:
- Under age 18 at the end of the tax year
- Age 18 at year-end and earned income did not exceed half of their support
- A full-time student age 19β23 at year-end whose earned income did not exceed half of their support
- At least one of the child's parents was alive at the end of the tax year
- The child does not file a joint return for the tax year
β οΈ Important: The age 18 and age 19β23 rules have an earned-income-to-support test. If the child's earned income exceeds half their total support, the kiddie tax does not apply β even if they have substantial unearned income. Many EA exam questions test this nuance.
What Counts as Unearned Income?
- Interest and dividends (ordinary and qualified)
- Capital gains (short-term and long-term)
- Rents and royalties
- Taxable scholarships and fellowships
- Pension and annuity income
- Trust and estate distributions (K-1 income)
- Unemployment compensation
- Taxable Social Security benefits
Income from 529 college savings plans used for qualified education expenses is not subject to the kiddie tax. However, non-qualified 529 distributions would be included.
How to Calculate the Kiddie Tax Step by Step
Calculating the kiddie tax involves determining the child's net unearned income and then applying the parent's marginal tax rate to the portion above the threshold. The IRS uses a three-layer approach on Form 8615. Here is the formula and a worked example for 2025.
Kiddie Tax Formula
Child's Net Unearned Income = Total Unearned Income - $1,350 (standard deduction) - Greater of $1,350 or itemised deductions connected to unearned income
Tax = Net Unearned Income x Parent's Marginal Tax Rate
Worked Example: 2025 Kiddie Tax Calculation
Scenario: Emma is 15 years old. She has no earned income and received $5,000 in dividends from a UGMA account in 2025.
- Total unearned income: $5,000
- First $1,350: Tax-free (covered by standard deduction)
- Next $1,350: Taxed at Emma's tax rate (10%) = $135
- Remaining $2,300: ($5,000 - $2,700) Taxed at parent's marginal rate
- If parent is in the 24% bracket: $2,300 x 24% = $552
- Total kiddie tax: $135 + $552 = $687
Without the kiddie tax, Emma would owe only $365 on the entire $5,000 at the 10% rate (after her standard deduction). The kiddie tax adds $322 to her total liability. This type of calculation appears regularly in EA Part 1 practice questions.
β Pro Tip: When the child has both earned and unearned income, calculate the standard deduction as the greater of $1,350 or ($450 + earned income), up to the regular standard deduction of $15,000 for 2025. Then apply the kiddie tax layers only to the net unearned income.
Form 8615 vs Form 8814: Which One to File?
Parents and tax preparers have two options for reporting a child's unearned income subject to the kiddie tax: Form 8615 (filed with the child's own return) or Form 8814 (parent elects to include the child's income on their return). The choice depends on the type and amount of the child's income.
| Feature | Form 8615 | Form 8814 |
|---|---|---|
| Filed with | Child's own tax return | Parent's tax return |
| Income limit | No upper limit | Child's gross income must be under $13,500 |
| Income types allowed | All types of unearned income | Interest and dividends only (including capital gain distributions) |
| Withholding/estimated payments | Allowed in child's name | No withholding or estimated payments in child's name |
| Effect on parent's AGI | No effect | Increases parent's AGI (may affect credits and NIIT) |
| Best for | Capital gains, K-1 income, trust distributions, complex situations | Simple interest/dividend income under $13,500, parents who want one return |
β οΈ Important: Choosing Form 8814 adds the child's income to the parent's AGI. This can reduce eligibility for AGI-sensitive tax benefits like the Child Tax Credit, education credits, and may trigger the Net Investment Income Tax (NIIT) at 3.8%. Always compare both options before filing.
Tax professionals preparing for the EA exam should be comfortable with both forms and know the exact eligibility criteria for Form 8814.
How to Minimise or Avoid the Kiddie Tax
While the kiddie tax cannot be entirely eliminated when a child has significant unearned income, there are legitimate planning strategies that families and their tax advisors can use to reduce the impact. These strategies are particularly relevant for Enrolled Agents advising clients.
- Use 529 plans: Qualified distributions from 529 plans for education expenses are not considered unearned income and are not subject to the kiddie tax
- Invest in tax-exempt municipal bonds: Interest from municipal bonds is federally tax-exempt and does not count toward the kiddie tax threshold
- Shift to growth stocks: Investments that appreciate in value but do not pay dividends defer the kiddie tax until the child sells the asset β ideally after they age out of kiddie tax eligibility
- Time asset sales: If possible, defer realising capital gains until the child turns 18 (or 24 if a student) and is no longer subject to the kiddie tax
- Roth IRA for working teens: If the child has earned income, contributing to a Roth IRA shelters future investment growth from the kiddie tax entirely
- Keep unearned income below $2,700: The simplest strategy β ensure the child's total unearned income stays under the threshold to avoid the parent's rate entirely
β Pro Tip: For EA exam purposes, know that tax avoidance strategies (legal) are distinct from tax evasion (illegal). The IRS expects Enrolled Agents to advise clients on lawful ways to minimise tax liability, including kiddie tax planning.
Kiddie Tax on the Enrolled Agent Exam
The kiddie tax is tested on Part 1 (Individuals) of the IRS Special Enrollment Examination (SEE). It falls under the taxation of dependents and the filing requirements domain. EA candidates should expect questions on the age thresholds, income thresholds, calculation methods, and the Form 8615 vs Form 8814 decision.
Key areas the EA exam tests on the kiddie tax include:
- Identifying which children are subject to the kiddie tax (age and support tests)
- Calculating the tax using the three-layer method
- Determining when Form 8615 vs Form 8814 applies
- Understanding the standard deduction for dependents with unearned income
- Recognising what types of income count as unearned income
If you're preparing for the EA exam, a structured EA study plan that covers individual taxation topics like the kiddie tax in depth will help you pass. Review the EA exam pass rates to understand the difficulty level, and explore our best EA review courses for structured preparation.
π Next Steps
Ready to master individual taxation topics like the kiddie tax and pass the EA exam? Explore our Enrolled Agent course β powered by Surgent, with adaptive learning technology that focuses your study time on the areas you need most.
About the Author
Vicky Sarin β Founder, Eduyush | CA, Finance Professional
Vicky has over 15 years of experience in accounting, finance, and professional education. As the founder of Eduyush, he has helped thousands of candidates prepare for certifications including EA, CPA, CMA, and ACCA. His hands-on experience with US tax regulations and exam preparation gives him a unique perspective on making complex tax topics accessible.
Frequently Asked Questions
Q: What are the kiddie tax rules for 2025?
For the 2025 tax year, the first $1,350 of a child's unearned income is tax-free. The next $1,350 is taxed at the child's rate. Any unearned income above $2,700 is taxed at the parent's marginal tax rate. This applies to children under 18 and certain full-time students under 24.
Q: What is the kiddie tax threshold for 2025?
The kiddie tax threshold for 2025 is $2,700 of unearned income. This is the point at which a child's unearned income begins to be taxed at the parent's marginal rate rather than the child's lower rate. The threshold increased from $2,600 in 2024.
Q: When does the kiddie tax apply?
The kiddie tax applies when a dependent child has unearned income exceeding $2,700 (2025), is required to file a return, is under 18 (or under 24 if a full-time student with limited earned income), has at least one living parent, and does not file a joint return.
Q: How can I avoid the kiddie tax?
You can minimise the kiddie tax by investing in 529 plans, tax-exempt municipal bonds, or growth stocks that defer income. Keeping a child's unearned income below $2,700 avoids the parent's rate entirely. Contributing to a Roth IRA (if the child has earned income) also shelters future growth.
Q: What is the difference between Form 8615 and Form 8814?
Form 8615 is filed with the child's own tax return and handles all types of unearned income with no upper limit. Form 8814 lets parents include a child's income on their return, but only if the child's gross income is under $13,500 and consists solely of interest and dividends.
Q: Are taxable scholarships subject to the kiddie tax?
Yes, taxable scholarships and fellowships are considered unearned income for kiddie tax purposes. If a child receives a scholarship that exceeds qualified education expenses, the taxable portion counts toward the $2,700 kiddie tax threshold for 2025.
Q: Is the kiddie tax tested on the Enrolled Agent exam?
Yes, the kiddie tax is tested on EA exam Part 1 (Individuals). Candidates should know the age and income thresholds, the three-layer calculation method, Form 8615 vs 8814 rules, and what counts as unearned income. Explore the Eduyush EA course for comprehensive preparation.
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