679 / How is unearned income of certain children treated for federal income tax purposes?
Note: Under the SECURE Act, the changes made by the 2017 Tax Act with respect to the kiddie tax rules were repealed. The repeal of the 2017 kiddie tax changes is effective beginning in 2020. However, taxpayers had the option of electing to have either set of rules apply retroactively, in 2018 and 2019, and could seek a refund if appropriate.1
Under certain circumstances, children under the age of 19 (age 24 for students) are required to pay tax on their unearned income above a certain amount at their parents' marginal rate. (See Q 753 for the current tax rates.) The tax applies to all unearned income, regardless of when the assets producing the income were transferred to the child.
The 2017 Tax Act changed the treatment of unearned income of minors by applying the tax rates that apply to trusts and estates to this income. Under the tax reform rule, which was repealed by the SECURE Act (but see above), (1) earned income of minors was taxed according to the individual income tax rates prescribed for single filers,2 and (2) unearned income of minors was taxed according to the applicable tax bracket that would apply if the income was that of a trust or estate (regardless of whether the income would be subject to ordinary income tax rates or capital gains rates).3
The so-called "kiddie tax" rules apply to children who have not attained certain ages before the close of the taxable year, who have at least one parent alive at the close of the taxable year, and who have over $2,700 in 2025-2026 ($2,600 in 2024, $2,500 in 2023, $2,300 in 2022, $2,200 in 2019-2021 and $2,100 in 2015-2018) of unearned income.4
The kiddie tax applies to:
(1)a child under age 18; or
(2)a child who has attained the age of 18 if: (a) the child has not attained the age of 19 (24 in the case of a full-time student) before the close of the taxable year; and (b) the earned income of the child does not exceed one-half of the amount of the child's support for the year.5
The tax applies only to "net unearned income." "Net unearned income" is defined as adjusted gross income that is not attributable to earned income, and that exceeds (1) the $1,350 standard deduction for a dependent child in 2026, plus (2) the greater of $1,350 or (if the child itemizes) the amount of allowable itemized deductions that are directly connected with the production of his unearned income.6
"Earned income," essentially, means all compensation for personal services actually rendered.7 A child is therefore taxed at his own rate on reasonable compensation for services.
Regulations specify that "unearned income" includes any Social Security or pension payments received by the child, income resulting from a gift under the Uniform Gifts to Minors Act, and interest on both earned and unearned income.8 In the case of a trust, distributable net income that is includable in the child's net income can trigger the tax; however, most accumulation distributions received by a child from a trust will not be included in the child's gross income because of the minority exception under IRC Section 665(b).9 Generally, the tax on accumulation distributions does not apply to domestic trusts (see Q 795). The source of the assets that produce unearned income need not be the child's parents.10 The application of the "kiddie tax" to funds provided to a child by sources other than the child's parents was held constitutional.11
Example: Cole is a child who is seventeen years of age at the end of the taxable year beginning on January 1, 2021. Both of Cole's parents are alive at the end of the taxable year. During 2021, Cole receives $2,400 in interest from his bank account and $1,700 from a paper route. Some of the interest earned by Cole from the bank account is attributable to Cole's paper route earnings that were deposited in the account. The balance of the account is attributable to cash gifts from Cole's parents and grandparents and interest earned prior to 2021. Some cash gifts were received by Cole prior to 2021. Cole has no itemized deductions and is eligible to be claimed as a dependent on his parent's return. Therefore, for the taxable year 2021, Cole's standard deduction is $2,050, the amount of Cole's earned income, plus $350. Of this standard deduction amount, $1,050 is allocated against unearned income, and $1,000 is allocated against earned income. Cole's taxable unearned income is $1,350, of which $1,050 is taxed without regard to section 1(g). The remaining taxable unearned income of $300 is net unearned income and is taxed under section 1(g). The fact that some of Cole's unearned income is attributable to interest on principal created by earned income and gifts from persons other than Cole's parents or that some of the unearned income is attributable to property transferred to Cole prior to 2021 will not affect the tax treatment of this income under section 1(g).
The parent whose taxable income is taken into account is (a) in the case of parents who are not married, the custodial parent of the child (determined by using the support test for the dependency exemption) and (b) in the case of married individuals filing separately, the individual with the greater taxable income.12 If the custodial parent files a joint return with a spouse who is not a parent of the child, the total joint income is applicable in determining the child's rate. "Child," for purposes of the kiddie tax, includes children who are adopted, related by half-blood, or from a prior marriage of either spouse.13
If there is an adjustment to the parent's tax, the child's resulting liability must also be recomputed. In the event of an underpayment, interest, but not penalties, will be assessed against the child.14
In the event that a child does not have access to needed information contained in the tax return of a parent, he (or his legal representative) may, by written request to the IRS, obtain such information from the parent's tax return as needed to file an accurate return.15 The IRS has stated that where the necessary parental information cannot be obtained before the due date of the child's return, no penalties will be assessed with respect to any reasonable estimate of the parent's taxable income or filing status, or of the net investment income of the siblings.16
1. SECURE Act § 501(c).
2. IRC § 1(j)(4)(B).
3. IRC § 1(j)(4).
4. Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.
5. IRC § 1(g)(2).
6. Rev. Proc. 2034-34.
7. IRC §§ 911(d)(2), 1(g)(4)(A)(i).
8. Temp. Treas. Reg. § 1.1(i)-1T, A-8, A-9, A-15.
9. Temp. Treas. Reg. § 1.1(i)-1T, A-16.
10. Temp. Treas. Reg. § 1.1(i)-1T, A-8.
11. See Butler v. U.S., 798 F. Supp. 574 (E.D. Mo. 1992).
12. Temp. Treas. Reg. § 1.1(i)-1T, A-11, A-12.
13. Temp. Treas. Reg. § 1.1(i)-1T, A-13, A-14.
14. Temp. Treas. Reg. § 1.1(i)-1T, A-17, A-19.
15. Temp. Treas. Reg. § 1.1(i)-1T, A-22.
16. Ann. 88-70, 1988-16 IRB 37.