Parent-Owned Taxable Brokerage: Kiddie Tax, NIIT, and Form 8615

When a parent holds a taxable brokerage account intended for a child, the kiddie tax only enters the picture if the account is titled in the child’s name. A brokerage account in the parent’s own name is taxed entirely on the parent’s return at the parent’s rates, no matter what the parent plans to do with the money later. Only when the account is set up as a custodial account under UGMA or UTMA does the child become the owner for tax purposes, and only then do the kiddie tax rules apply. For 2026, those rules tax a child’s unearned income above $2,700 at the parent’s marginal rate.

Parent-Owned Account vs. Custodial Account

If the account is titled solely in the parent’s name, every dollar of interest, dividends, and realized capital gains flows onto the parent’s Form 1040 at the parent’s ordinary income or capital gains rate. There is no kiddie tax calculation, no separate return for the child, and no irrevocable transfer of wealth. The parent can trade, withdraw, and redirect the money for any purpose. The trade-off is that none of the growth ever gets to sit in the child’s lower bracket.

A custodial account under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act is titled in the child’s name with the parent serving as custodian. The transfer into that account is an irrevocable gift. The child legally owns the assets, the account uses the child’s Social Security number, and the investment income is reported as the child’s. That sounds like a straight tax win, since children usually have little other income. The kiddie tax exists to neutralize most of that advantage.

How the Kiddie Tax Works in 2026

The kiddie tax, set out in Internal Revenue Code Section 1(g), keeps parents from shifting large amounts of investment income into a child’s lower bracket.¹ It applies to unearned income: interest, dividends, capital gain distributions, and other investment returns.²

Three groups of children are covered:

Children under 18. All unearned income above the threshold is taxed at the parent’s rate, regardless of how much the child earns from a job.
18-year-olds, if the child’s earned income does not exceed half of their own support for the year.
Full-time students aged 19 through 23, under the same half-of-support test.

The rule does not apply if neither parent is alive at the end of the tax year, or if the child files a joint return.¹

For 2026, the tax runs in three tiers:

The first $1,350 of unearned income is tax-free, covered by the child’s standard deduction.
The next $1,350, up to $2,700 total, is taxed at the child’s own rate, typically 10%.
Everything above $2,700 is taxed at the parent’s marginal rate.

The parent’s-rate tier is where families feel it. A custodial account throwing off $10,000 in dividends and interest owes no tax on the first $1,350, roughly $135 on the next $1,350, and the remaining $7,300 is taxed as though the parent earned it. In the 32% bracket, that last piece alone runs about $2,336 in federal tax.²

Which Return Reports the Child’s Income

When a child owes kiddie tax, there are two ways to file, and the choice has real consequences.

Form 8615 on the Child’s Own Return

Form 8615, “Tax for Certain Children Who Have Unearned Income,” is the standard route. The child files a return with Form 8615 attached, and the form calculates how much of the child’s unearned income is taxed at the parent’s rate.³ Because the calculation depends on the parent’s taxable income and filing status, the child’s return usually can’t be completed until the parent’s return is finished or close to it.

Form 8814 on the Parent’s Return

A parent can instead fold the child’s income directly onto the parent’s return using Form 8814, avoiding a separate return for the child. That election is only available if all of the following are true:

The child’s only income was interest, ordinary dividends, and capital gain distributions.
The child’s gross income was less than $13,500 for the tax year.
No estimated tax payments were made for the child, and no backup withholding applied.

The Form 8814 election simplifies paperwork. The income above $2,700 is still taxed at the parent’s rate, and rolling the child’s income onto the parent’s return raises the parent’s adjusted gross income, which can affect phase-outs for other deductions and credits.⁴

Capital Gains Rates and the 3.8% NIIT Trap

The type of income matters even when the kiddie tax applies. Long-term capital gains and qualified dividends get preferential rates of 0%, 15%, or 20% depending on taxable income. If the child’s total taxable income stays low enough, gains and qualified dividends within the lower kiddie tax tiers can fall into the 0% bracket. That’s a genuine advantage of the custodial structure, but it only reaches the first $2,700 of unearned income. Above that, the parent’s capital gains rate applies, typically 15% or 20% for families with meaningful account balances. Short-term capital gains and ordinary (non-qualified) dividends get no preference and are taxed as ordinary income within the kiddie tax tiers.

Children whose tax is computed on Form 8615 may also owe the 3.8% Net Investment Income Tax.⁵ The NIIT applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds the statutory threshold: $200,000 for single filers and $250,000 for married couples filing jointly.⁶ Those thresholds are not adjusted for inflation and have been unchanged since 2013.

A child filing a stand-alone return almost never crosses $200,000, so the NIIT rarely hits the child directly. Here’s the trap: if the parent reports the child’s income on the parent’s return using Form 8814, the additional income lifts the parent’s modified adjusted gross income and can push the family across the NIIT threshold. That adds nearly four percentage points to the effective tax rate on the child’s investment income, and it’s easy to miss when choosing between the two reporting methods.

Cost Basis When You Move Shares Into a Child’s Account

Gifting appreciated stock or mutual fund shares into a custodial account does not give the child a fresh cost basis at current market value. Under the carryover basis rule in Internal Revenue Code Section 1015, the child inherits the parent’s original cost basis.⁷ Shares bought at $20 and gifted at $50 keep a $20 basis in the child’s hands. When the child sells, the gain is measured from $20.

A special rule applies when the parent gifts an asset worth less than the parent paid for it. The child then has two bases. For calculating a gain, the child uses the parent’s original higher basis. For calculating a loss, the child uses the lower fair market value at the time of the gift. If the child sells between those two numbers, no gain or loss is recognized.⁷ The practical result: don’t gift losing positions. Sell them in your own account, claim the capital loss on your return, and gift the cash. Transferring a losing security directly wastes part or all of the loss deduction.

Because basis carries over, records matter. Brokerage firms track cost basis for shares purchased inside the account, but they generally do not carry over basis information on shares gifted in from outside. Provide written documentation of your original purchase price and acquisition date at the time of transfer, so the child isn’t reconstructing it years later at sale.

Gift Tax Reporting When You Fund the Account

Every transfer of cash or securities into a child’s custodial account is a gift for federal tax purposes. Most parents will never owe gift tax, but reporting rules still apply.

For 2026, a parent can give up to $19,000 per recipient per year without any gift tax reporting obligation. A married couple can give $38,000 to the same child by using both spouses’ exclusions.⁸ The exclusion resets each calendar year, so funding gradually avoids the paperwork entirely.

Transfers above $19,000 to a single child in one year must be reported on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.⁹ Filing Form 709 doesn’t necessarily mean tax is owed. The excess simply reduces the parent’s lifetime gift and estate tax exemption, which for 2026 is $15,000,000 per individual following an increase enacted by the One, Big, Beautiful Bill signed into law on July 4, 2025.¹⁰ With an exemption that high, virtually no parent funding a child’s brokerage account will owe federal gift tax. Every dollar used during life is a dollar unavailable to shelter the estate at death, so large one-time transfers still deserve planning.

Control and Financial Aid Trade-Offs

Custodial accounts buy some tax flexibility at the cost of control. Every UGMA and UTMA account has a termination age set by state law, and the most common defaults are 18 and 21. Once the child reaches that age, the assets are theirs to spend however they choose, regardless of the parent’s original intentions. There is no way to extend the custodianship past the state-mandated age.

UGMA and UTMA assets are also reported as the student’s assets on the FAFSA, not the parent’s.¹¹ The financial aid formula assesses student-owned assets at a much higher rate than parent-owned assets. A $50,000 custodial account can reduce need-based aid eligibility by thousands more than the same $50,000 held in a parent-titled brokerage account. If need-based aid is on the horizon, factor this in before choosing the custodial route.

Penalties for Skipping the Filings

A child who owes tax on investment income and does not file a return is subject to the standard failure-to-file penalty: 5% of the unpaid tax for each month or partial month the return is late, up to 25%. For returns due after December 31, 2025, a return that is more than 60 days late triggers a minimum penalty of $525 or 100% of the unpaid tax, whichever is less.¹² Interest runs from the original due date.

The same penalty structure applies to a late Form 709. Even when no tax is due because of the lifetime exemption, the IRS expects the form. Unreported gifts can create problems at death when the IRS reconstructs the donor’s cumulative gift history.

Professional preparation of a child’s return with Form 8615 typically runs several hundred dollars, worth building into the cost of keeping a custodial account open. Electing Form 8814 avoids that extra filing, at the price of the AGI and NIIT trade-offs already discussed.

1
Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
2
Internal Revenue Service. Instructions for Form 8615 (2025)
3
Internal Revenue Service. Form 8615 (2025) Tax for Certain Children Who Have Unearned Income
4
Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
5
Internal Revenue Service (IRS). IRS Tax Tip: Tax Rules for Children with Investment Income
6
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
7
Office of the Law Revision Counsel. 26 U.S.C. 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
8
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
9
Internal Revenue Service. Instructions for Form 709 (2025)
10
Internal Revenue Service. What’s New – Estate and Gift Tax
11
Federal Student Aid. How Do I Answer the “Current Net Worth of Investments, Including Real Estate” Question?
12
Internal Revenue Service. Failure to File Penalty