Watch Out for the Kiddie Tax

Do your children have income-generating assets in a custodial account? If so, be sure you understand the so-called kiddie tax.

This law was passed to discourage wealthier individuals from transferring assets to their children to take advantage of their lower tax rates. The kiddie tax has seen many iterations, but current rules tax a minor child's unearned income—including capital gains distributions, dividends, and interest income—at the parents' tax rate if it exceeds the annual limit ($2,500 in 2023).

The tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24) and works like this:

• The first $1,250 of unearned income is covered by the kiddie tax's standard deduction, so it isn't taxed.
• The next $1,250 is taxed at the child's marginal tax rate.
• Anything above $2,500 is taxed at the parents' marginal tax rate.

If your child also has earned income, say from a summer job, the rules become more complicated. To learn more, see IRS Publication 929 or consult a tax advisor.

More from Charles Schwab

How Portability Helps Couples Reduce Estate Taxes

The portability rule allows spouses to use each other's unused lifetime estate and gift tax exemption—but it's not automatic and should be part of a larger estate planning conversation.

Thinking About Downsizing Your Home?

Moving to a smaller house can have many financial advantages. Here's what you should consider from a tax perspective.

Are Political Contributions Tax Deductible?

While charitable donations are tax-deductible, political contributions decidedly are not. Understanding the distinctions can help ensure that your giving is aligned with your objectives.

Related topics

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk including loss of principal.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner or Investment Manager.