Kiddie Tax Explained: How a Child’s Investment Account Can Backfire

The kiddie tax is one of the most overlooked rules in family tax planning. Many parents open investment accounts for their children with good intentions. They want to teach money habits, start investing early, or shift assets into the child’s name. But once a child’s unearned income rises above the annual threshold, the tax result may not be what the parent expected. For 2026, the kiddie tax can apply when a child has more than $2,700 of unearned income. That may include interest, dividends, capital gains, and other investment income. Income above the threshold may be taxed at the parents’ rate instead of the child’s lower rate. The rule generally applies to children under age 19 and full-time students under age 24, if the support rules are met. This is why a custodial account, UTMA, UGMA, gifted stock, or taxable investment account in a child’s name should be reviewed carefully. There is also a financial aid issue. A custodial account is generally treated as the student’s asset, which may hurt college aid more than parents expect. That does not mean every child investment account is wrong. Small balances may still make sense. Earned income is treated differently. A Roth IRA may be worth reviewing when the child has legitimate earned income. A 529 plan may be a better education planning tool in some cases. The key idea is simple: Do not move money into a child’s name just because it feels smart. Review the structure first. John Geantasio CPA LLC helps families, business owners, and financially serious taxpayers think through tax planning, documentation, and long-term consequences before decisions are made. This content is for educational purposes only and should not be treated as individualized tax advice. Kiddie tax treatment, college aid impact, account choice, and reporting requirements depend on your full facts. Before funding a child’s investment account, speak with a qualified tax professional.