Money earned inside a UTMA account is taxed to the child who owns it, but the IRS kiddie tax rules limit how much of that income gets the child’s low rate. For 2026, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate, and everything above $2,700 is taxed at the parent’s marginal rate.1Internal Revenue Service. Revenue Procedure 2025-32 Those are the UTMA tax rules in a sentence. The rest is which form to file, what kind of income the account throws off, and a couple of traps that catch families every year.
The Three Tiers of Kiddie Tax
Every dollar of interest, dividends, and capital gains a UTMA earns is the child’s unearned income. For 2026, the IRS sorts it into three layers:
- First $1,350: tax-free, absorbed by the dependent’s standard deduction.
- Next $1,350 (up to $2,700 total): taxed at the child’s own marginal rate, usually 10%.
- Above $2,700: taxed at the parent’s marginal rate.
The structure exists to shut down the old strategy of parking investment assets in a child’s name to get a lower rate. The thresholds are adjusted for inflation each year.1Internal Revenue Service. Revenue Procedure 2025-32
Which Children the Rules Apply To
The kiddie tax reaches further than most people assume. It applies to a child who, at the end of the tax year:
- is under 18, regardless of earned income;
- is 18 and did not have earned income covering more than half of their own support; or
- is 19 through 23, a full-time student, and did not have earned income covering more than half of their own support.
A 22-year-old college senior with a working UTMA is still inside the rules if a part-time paycheck doesn’t cover half of living expenses.2Office of the Law Revision Counsel. 26 USC 1(g) – Certain Unearned Income of Children Taxed as if Parents Income At least one parent must be alive at year-end, and the child cannot file a joint return.
How Different Kinds of UTMA Income Are Taxed
The tier structure controls whose rate applies, but the character of the income controls which rate table gets used.
Interest and ordinary dividends are ordinary income. So are short-term capital gains from anything held one year or less. Within the tiers, the first $1,350 is sheltered, the second $1,350 is taxed at the child’s ordinary rate (usually 10%), and the rest is taxed at the parent’s ordinary rate. Financial institutions report these amounts on Form 1099-INT and Form 1099-DIV.3Internal Revenue Service. General Instructions for Certain Information Returns (2025)
Long-term capital gains and qualified dividends keep their preferential rates, but the kiddie tax still decides whose preferential rate applies. On $10,000 of long-term gains, the first $2,700 uses the child’s rates (where qualified dividends and long-term gains often land at 0%), and the remaining $7,300 uses the parent’s long-term capital gains rate, typically 15% and possibly 20% for high-income parents.
When a Return Has to Be Filed
A dependent child must file a federal return for 2026 if unearned income exceeds $1,350.4Internal Revenue Service. Publication 501 (2025), Dependents, Standard Deduction, and Filing Information Below that, no return is required because the standard deduction covers it. Above that, there are two paths: the child files their own Form 1040, or the parent folds the child’s income into the parent’s return.
Form 8615: Child Files Their Own Return
When the child files and unearned income tops $2,700, Form 8615 goes with the return. This is the form that actually runs the kiddie tax math. It takes the child’s net unearned income above $2,700, applies the parent’s taxable income to determine the rate, and computes tax at the parent’s marginal rate.5Internal Revenue Service. Instructions for Form 8615 (2025) Filling it out requires access to the parent’s taxable income figure, which can complicate matters when parents are divorced.
Form 8814: Parent Reports the Child’s Income
A parent can attach Form 8814 to their own return instead of filing a separate one for the child. The election is only available when all of these are true:
- The child’s only income is interest and dividends, including capital gain distributions.
- The child’s gross income for 2026 is more than $1,350 and less than $13,500.
- The child would otherwise have to file a return.
Rental income, royalties, or any material earned income disqualifies the election, as does gross income of $13,500 or more.6Internal Revenue Service. Instructions for Form 8814 (2025)
Why 8814 Often Costs More Than It Saves
The 8814 shortcut looks convenient and often isn’t. On a separate return for the child, qualified dividends and long-term gains falling in the $1,350-to-$2,700 tier can reach the 0% preferential rate. Elect to report on the parent’s return, and that same income is taxed at a flat 10%. The IRS instructions put the direct cost at up to $135 per child.6Internal Revenue Service. Instructions for Form 8814 (2025)
The larger cost is upstream. Adding the child’s income to the parent’s return raises the parent’s adjusted gross income, which can shrink or eliminate the child tax credit, the earned income credit, education credits, IRA deduction, and the student loan interest deduction. For a family close to any of those phaseouts, the election can quietly cost far more than $135.
Gifts Into the Account
Funding a UTMA is an irrevocable gift. Once assets go in, they belong to the child, and the donor cannot pull them back. The annual gift tax exclusion for 2026 is $19,000 per recipient, so a donor can put up to $19,000 into a child’s UTMA without filing a gift tax return. Married couples can combine to $38,000 per child per year. Contributions above the exclusion require Form 709, though gift tax is typically not owed until the donor uses up their lifetime exemption.7Internal Revenue Service. Frequently Asked Questions on Gift Taxes
One planning point worth flagging: if the donor also serves as custodian and dies before the child reaches majority, the account can be pulled back into the donor’s taxable estate under IRC 2038, because the custodian’s power over the funds counts as a retained power. Naming someone other than the donor as custodian avoids the problem.
Basis in Gifted Assets
When someone contributes appreciated stock or other property, the donor’s basis carries over to the child. Stock a grandparent bought for $5,000 and contributed when it was worth $15,000 still has a $5,000 basis in the child’s hands. When it’s eventually sold, the gain is measured from $5,000.8eCFR. 26 CFR 1.1015-1 – Basis of Property Acquired by Gift
If the fair market value at the time of the gift was below the donor’s basis (a built-in loss), a dual-basis rule applies. The child uses the lower fair market value to figure any loss on a future sale, but the donor’s original basis to figure any gain. That blocks donors from shifting unrealized losses to the child.
What Happens When the UTMA Terminates
A UTMA ends when the beneficiary reaches the age of majority set by state law. That is often 21, but ranges from 18 to 25 depending on the state and, in some states, on what the donor specified when funding the account. At termination, the custodian turns over full control to the now-adult beneficiary.9Social Security Administration. POMS SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act
The transfer itself is not a taxable event. The assets already belonged to the minor the entire time. Going forward, the former minor reports all investment income on their own return, and once they age out of the kiddie tax categories above, their unearned income is taxed at their own rates without any lookthrough to a parent.