Kiddie Tax

The kiddie tax is the federal rule that prevents high-income families from shifting unlimited investment income to their children to take advantage of the child's lower tax rates. Before the kiddie tax existed, a parent in the 37% bracket could transfer appreciated stock or dividend-paying investments to a minor child, have the income taxed at the child's 10% rate, and save 27 cents on every dollar of investment income — with no real economic change to the family's wealth. Congress closed that strategy in 1986, and the rules have been tightened several times since. The kiddie tax does not eliminate income-shifting strategies entirely — there is still a meaningful benefit, particularly once the child leaves full-time student status — but it limits and shapes how those strategies work.

For tech workers in the top federal brackets, understanding the kiddie tax is essential for three reasons. First, it governs the after-tax value of transferring appreciated RSU shares to UTMA accounts for minor children — a common strategy at FAANG companies where annual vesting regularly produces more shares than the parents need for their own spending. Second, it directly affects the timing and magnitude of UTMA withdrawals in the college years, when the kiddie tax typically still applies and limits the income-shifting benefit. Third, it disappears entirely once a child reaches age 24 (or leaves full-time student status earlier), at which point the tax savings from income already in an UTMA account or trust can be realized at the child's own rate — often 0% or 15% on long-term capital gains versus the parent's 23.8%.

How the Kiddie Tax Works: The Mechanics

The kiddie tax operates by taxing a child's unearned income above a threshold at the parent's marginal tax rate rather than the child's own (lower) rate. "Unearned income" means investment income: interest, dividends, capital gains distributions, and realized capital gains. It does not include wages, salaries, or self-employment income from the child's own work.

For 2026, the threshold structure is:

• First $1,350: Tax-free — covered by the child's standard deduction allocated to unearned income
• Next $1,350 (income from $1,350 to $2,700): Taxed at the child's own marginal rate — typically 10% or 12%
• Unearned income above $2,700: Taxed at the parent's marginal rate

The "parent's marginal rate" means the rate that applies to the parent's last dollar of income — which for a FAANG senior engineer or engineering manager in California can be 37% federal ordinary income, 23.8% federal long-term capital gains (20% + 3.8% NIIT), or 13.3% California state income tax. The kiddie tax does not distinguish between types of investment income for purposes of which parent rate applies — the child's long-term capital gain above $2,700 is taxed at the parent's long-term capital gains rate, and the child's interest income above $2,700 is taxed at the parent's ordinary income rate.

The calculation is done on Form 8615, which is filed with the child's tax return. The parent's taxable income — and marginal rate — is pulled from the parent's return to compute the child's tax. If the parents file separately, the form uses the income of the parent with the higher taxable income. If the child's parents are divorced, the custodial parent's return governs.

Who the Kiddie Tax Applies To

The kiddie tax applies to a child if all three of the following are true:

1. The child has net unearned income above $2,700 (2026 threshold)
2. The child does not file a joint return
3. The child meets one of the age/dependency tests:

• Under age 18 at year-end: Kiddie tax applies regardless of student status or earned income
• Age 18 at year-end: Kiddie tax applies if the child's earned income does not exceed half of their total support for the year — only earned income (wages, tips, self-employment) counts toward clearing this test
• Ages 19–23, full-time student: Kiddie tax applies if the child's earned income does not exceed half of their total support for the year — only earned income counts, not investment income or withdrawals from savings
• Age 24 and older: Kiddie tax never applies — unearned income is taxed entirely at the child's own rate

The "half of support" test for ages 18–23 compares the child's earned income to the total cost of their support — housing, food, tuition, clothing, transportation. To escape the kiddie tax, the child must provide more than half of their own total support through earned income specifically. A full-time student whose parents pay $60,000 per year in tuition, room, and board would need more than $30,000 in earned income from their own work to clear the test. A critical nuance: unearned income — investment income, UTMA account withdrawals, or savings — does not count toward this test even if the child uses it to pay for college. A student who draws $40,000 from an UTMA account to fund a year of school and earns only $10,000 from a part-time job has not provided more than half their support through earned income and remains subject to the kiddie tax. For most full-time students, the support test is difficult to meet through earned income alone.

The most common inflection point: a child who graduates college at 22 and starts working full-time. Even if they are under 24, their earned income from their job likely exceeds half of their now self-funded support, and the kiddie tax no longer applies from that point forward. More definitively, once the child turns 24, the kiddie tax is permanently off — there is no income or support test at age 24 and above.

The Kiddie Tax and UTMA Accounts: When the Benefit Is Limited

For a FAANG family using UTMA accounts to transfer appreciated RSU shares to children, the kiddie tax limits — but does not eliminate — the tax savings during the years the child is subject to it.

Consider a family where the parents are in the 23.8% federal long-term capital gains bracket (20% + 3.8% NIIT) and California's 13.3% income tax rate. Their child is 14, has no earned income, and the UTMA account generates $10,000 in long-term capital gains in a given year from selling appreciated stock.

The kiddie tax calculation on the $10,000 gain:

• First $1,350: tax-free
• Next $1,350: taxed at child's rate — 0% on long-term gains if the child's total income is below the 0% threshold ($49,450 single in 2026). Tax: $0
• Remaining $7,300: taxed at parent's long-term capital gains rate — 23.8% federal + 13.3% California = 37.1%. Tax: $2,708

Compare this to the parents selling the same stock directly from their own account: $10,000 × 37.1% = $3,710. The UTMA saves the family $1,002 on this $10,000 of gain during the kiddie tax years. That is meaningful but modest — the primary benefit of the UTMA is not during the kiddie tax years in a high-state-tax jurisdiction like California. The real payoff comes later.

For a Washington state family, the picture is slightly better during the kiddie tax years because Washington does not have a state income tax and only taxes long-term gains above $278,000. The kiddie-tax-subject portion of UTMA income faces only the federal parent rate (23.8%), with no additional state layer for either parent or child.

When the Kiddie Tax Expires: The Real Opportunity

The compelling case for UTMA accounts funded with appreciated stock is not the modest savings during the kiddie tax years — it is what happens after the kiddie tax expires. Once a child is 24, working full-time, and no longer subject to the kiddie tax, their unearned income is taxed entirely at their own rate. For a recent college graduate or young professional with modest earned income, that rate can be dramatically lower than the parents' rate.

A 25-year-old software engineer in their first full-time job earning $90,000 has a taxable income (after the $14,600 standard deduction) of roughly $75,400. Their long-term capital gains rate is 15% federally — not 20% + 3.8% NIIT. If they live in Texas, Florida, or another no-income-tax state, there is no state layer either. They can additionally harvest long-term gains up to the 0% threshold: if total taxable income (including capital gains) stays below $49,450, those gains are tax-free. With $75,400 in ordinary income already, they are above the 0% threshold — but the 15% rate is still far below a California parent's 37.1% combined rate.

More powerfully: in a year when the child is a graduate student with minimal income — $20,000 in stipend income — their total taxable income after the standard deduction is approximately $5,400, well within the 0% long-term capital gains bracket. Selling $44,050 of appreciated stock from the UTMA in that year generates zero federal capital gains tax. The family has permanently eliminated the tax on that gain — tax that would have been 23.8% federal if the parent had held and sold the stock from their own account.

This is the strategic use of UTMA accounts for tech worker families: fund the account during high-income RSU vesting years by transferring appreciated shares (no gain recognized at transfer, carryover basis to the child), allow the account to compound over the child's minor years (modest kiddie tax drag during this period), and then harvest gains at the child's own rate — potentially 0% — during the years after the kiddie tax expires and before the child's own career income pushes them into higher brackets.

The Kiddie Tax and Early Retirement Planning

For parents pursuing FIRE, the kiddie tax interacts with the retirement timeline in a specific way. A FAANG engineer who retires at 47 and has two children aged 13 and 10 at retirement will have children subject to the kiddie tax for another 5–14 years after leaving their job. During the early retirement years when the parent's own income drops dramatically — no W-2, drawing from taxable accounts at low capital gains rates — the parent's marginal rate may fall from the top bracket to 15% or even 0% on long-term gains.

When the parent's own rate drops, the kiddie tax becomes less punitive: the child's UTMA gains above $2,700 are taxed at the parent's now-lower rate rather than the top bracket. In a year when the early-retired parent has $80,000 in long-term capital gains from their own taxable account and is in the 15% federal bracket, the child's kiddie-tax-subject UTMA income is also taxed at 15% — not 23.8%. This makes the early FIRE years a particularly good time to harvest gains from UTMA accounts, since the parent's lower income reduces the kiddie tax rate applied to the child's income.

The strategic sequence for a FIRE-oriented family with UTMA accounts:

• High-earning FAANG years (ages 35–47): Fund UTMA accounts with appreciated RSU shares annually up to the gift exclusion. Accept modest kiddie tax drag — benefit is primarily estate reduction and deferred gain shifting, not current-year tax savings in high-state-tax jurisdictions
• Early FIRE years (ages 47–55): Parent income drops; kiddie tax rate on child's UTMA gains falls. Harvest UTMA gains while kiddie tax rate is 15% rather than 23.8%
• Post-kiddie-tax years (child age 24+): Harvest remaining UTMA gains at the child's own rate — potentially 0% during graduate school or early career low-income years

California's Kiddie Tax: Conformity With a Twist

California generally conforms to the federal kiddie tax framework but applies its own rate schedule. The $2,700 threshold (the sum of the two $1,350 amounts) is the same under federal and California rules. The "parent's rate" for California kiddie tax purposes is the parent's California marginal rate — up to 13.3% for parents with income above $1,000,000, or 9.3% for parents in the $68,350–$338,639 income range (2026 approximate figures).

For a California FAANG family in the 9.3%–13.3% California bracket, the child's UTMA gains above $2,700 face both the federal parent rate (23.8% long-term) and the California parent rate (9.3%–13.3%) — a combined rate of 33.1%–37.1%. The savings relative to the parent holding the stock directly are minimal in the kiddie tax years: the child's first $2,700 saves tax, but the bulk of the investment income is taxed at nearly the same combined rate as if the parent held it.

This California reality means that for California-resident tech workers, the primary motivation for UTMA contributions during the kiddie tax years is not current-year tax savings — it is the long-term compounding of assets that will eventually be taxed at the child's rate (often in a lower-tax or no-income-tax state), the estate reduction, and the irrevocable transfer of the appreciation risk and reward to the next generation.

Kiddie Tax on Different Types of Unearned Income

The kiddie tax applies to all forms of unearned income but the applicable parent rate varies by income type:

• Long-term capital gains: Taxed at the parent's long-term capital gains rate — 20% for high-income parents, plus 3.8% NIIT if applicable. For most FAANG parents, this is 23.8% federal. California adds its income tax rate on top.
• Short-term capital gains: Taxed at the parent's ordinary income rate — up to 37% federal plus state for high earners. This makes realizing short-term gains in a child's UTMA account during the kiddie tax years particularly expensive.
• Qualified dividends: Taxed at the parent's qualified dividend rate — same as long-term capital gains rates, so 23.8% federal for high-income parents.
• Ordinary dividends and interest: Taxed at the parent's ordinary income rate — up to 37% federal. High-yield bond funds, CDs, and money market income in a child's account during kiddie tax years are taxed at the top ordinary rate if the parent is in the top bracket.

The practical implication: during the kiddie tax years, hold tax-efficient investments in UTMA accounts — low-turnover index funds that generate minimal dividends and defer capital gains — rather than high-dividend funds, bond funds, or actively managed funds that distribute ordinary income. The goal is to minimize current-year taxable income in the account while the kiddie tax applies, preserving the bulk of the gains for realization after the kiddie tax expires.

Kiddie Tax Interaction With the Child's Own Income

The kiddie tax applies only to unearned income — the child's earned income (wages, salaries, self-employment) is always taxed at the child's own rate, not the parent's. A 16-year-old who earns $12,000 from a summer internship pays income tax on that $12,000 at their own low rate (10% or 12%), regardless of the kiddie tax. The kiddie tax only reaches their investment income above $2,700.

A dependent child's standard deduction is the greater of $1,350 or earned income plus $450, capped at the full standard deduction ($14,600 in 2026). This means earned income actually increases the standard deduction rather than consuming it. A child with $5,000 in summer wages has a standard deduction of $5,450 — larger than the $1,350 floor. Separately, the kiddie tax calculation has its own statutory floor: the first $1,350 of unearned income is always sheltered (covered by the base dependent standard deduction allocated to unearned income), and the next $1,350 is taxed at the child's own rate — regardless of how much earned income the child has. These two $1,350 amounts are built into the Form 8615 calculation itself, not simply allocated from the general standard deduction. Only unearned income above $2,700 is taxed at the parent's rate.

The support test for ages 18–23 is the critical variable. If a child working full-time after college but before age 24 earns enough to cover more than half of their own support, the kiddie tax does not apply to them even if they are still technically a dependent. This often means the kiddie tax ends at age 22 or 23 for children who graduate and immediately enter the workforce, not at age 24.

Strategies to Minimize the Kiddie Tax

There is no way to eliminate the kiddie tax during the years it applies — the rules are fixed by statute. But several strategies reduce its impact:

• Hold appreciated positions rather than selling: Unrealized gains are not income. An UTMA account that holds appreciated stock without selling generates no capital gains income subject to the kiddie tax. Defer realization until the kiddie tax expires.
• Use tax-efficient investments: Low-turnover index funds generate minimal taxable distributions. Growth-oriented funds that pay few or no dividends accumulate value without triggering annual unearned income. Avoid bond funds, REITs, and high-yield funds in UTMA accounts during kiddie tax years.
• Keep UTMA income below $2,700: The first $2,700 in unearned income receives preferential treatment — $1,350 is tax-free and the next $1,350 is taxed at the child's low rate. If the UTMA account is small or the investments are tax-efficient enough to keep annual income below this threshold, the kiddie tax never applies.
• Harvest losses to offset kiddie-tax-subject gains: Capital losses in the UTMA offset capital gains. If the account has any loss positions, harvesting them before year-end reduces the unearned income subject to the parent's rate.
• Time large gain realizations for post-kiddie-tax years: If possible, defer selling low-basis lots until after the child turns 24 or leaves full-time student status and earns more than half of their own support. The same gain that would be taxed at 23.8% + state during the kiddie tax years may be taxed at 0%–15% afterward.
• Reduce parent's marginal rate: Since the kiddie tax is anchored to the parent's rate, actions that reduce the parent's own taxable income — maximizing 401(k), HSA, and backdoor Roth contributions; harvesting losses in the parent's accounts; taking sabbaticals or retiring early — also reduce the kiddie tax rate on the child's income. This is the FIRE connection: a parent who retires and drops from the 37% ordinary rate to the 22% bracket reduces the kiddie tax rate on their child's ordinary unearned income from 37% to 22%.

529 Plans as an Alternative: Avoiding the Kiddie Tax Entirely

The kiddie tax does not apply to 529 plan earnings. Investment growth inside a 529 plan is not reportable as income to anyone — parent or child — as long as distributions are used for qualified education expenses. There is no unearned income triggering the kiddie tax; the earnings never appear on anyone's tax return until withdrawn, and qualified withdrawals are tax-free entirely.

This makes 529 plans strictly superior to UTMA accounts from a kiddie-tax perspective during the education years: 529 earnings are completely off the income-tax radar. The trade-off is flexibility — 529 distributions for non-education purposes face a 10% penalty plus income tax on earnings, while UTMA assets are available for any purpose without penalty.

The optimal structure for a FAANG family typically combines both:

• 529 plans for the expected education cost — no kiddie tax on growth, tax-free qualified withdrawals
• UTMA accounts for amounts beyond education funding — accept kiddie tax drag during minor years in exchange for complete flexibility at the age of majority

For a family uncertain whether their child will attend a four-year college, overweighting UTMA over 529 reduces the penalty risk from unused 529 assets. For a family confident in a traditional college path, the 529 eliminates kiddie tax on education-destined investment income entirely.