Money earned inside a UTMA custodial account belongs to the child, so the child is the taxpayer, not the parent or custodian. UTMA tax rates for 2026 run on three tiers: the first $1,350 of the child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate (usually 10%), and anything above $2,700 is taxed at the parent’s marginal rate under the Kiddie Tax.1Internal Revenue Service. Rev. Proc. 2025-32 That parent-rate step is the point of the rule. It stops families from parking large sums in a child’s name just to use a lower bracket.
The 2026 Thresholds in Detail
Unearned income covers interest, dividends, and capital gains generated by the UTMA assets. Any wages the child earns from a job sit outside these rules and are taxed at the child’s own rate like any other worker’s.
- Up to $1,350: no federal tax. This is the dependent’s standard deduction for unearned income.
- $1,351 to $2,700: taxed at the child’s marginal rate, typically 10%.
- Above $2,700: taxed at the parent’s marginal rate if that rate is higher than the child’s.1Internal Revenue Service. Rev. Proc. 2025-32
The child’s net unearned income is effectively stacked on top of the parent’s taxable income to find the rate that applies.2Internal Revenue Service. Instructions for Form 8615 A parent in the 22% bracket sees the excess taxed at 22%; a parent in the 37% bracket sees it taxed at 37%. When more than one child in the family is subject to the Kiddie Tax, the net unearned income of all of them is combined before an allocable share is figured for each.3Office of the Law Revision Counsel. 26 USC 1 – Section: (g) Certain Unearned Income of Children Taxed as if Parent’s Income
For an account earning $2,700 or less in a year, the maximum federal tax is roughly $135. The real cost begins once dividends or gains push past that ceiling.
Who the Kiddie Tax Applies To
A child falls under the Kiddie Tax if they are under 18 at the end of the tax year. It also reaches 18-year-olds whose earned income doesn’t cover more than half their own support, and full-time students between 19 and 23 who meet that same support test and are claimed as dependents.4Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) Once the child ages out or becomes self-supporting, all investment income is taxed at their own individual rate.
Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends have their own rate schedule that caps at 20%. For 2026, a single filer, including a dependent child, pays 0% on long-term gains up to $49,450 of taxable income and 15% between $49,450 and $545,500. Most children never come close to those figures on their own.
The Kiddie Tax changes the picture once unearned income clears $2,700. The applicable long-term rate is then figured as if the child’s net unearned income sat on top of the parent’s return, so the parent’s total income sets the rate.2Internal Revenue Service. Instructions for Form 8615 A child with $5,000 in long-term gains might owe nothing at their own rate, but if the parent’s income is already above $49,450, the amount caught by the Kiddie Tax may be taxed at 15%.
Short-term gains get no special treatment. They’re ordinary income and run through the same three-tier structure as interest.
Filing the Return: Form 8615 or Form 8814
When a child subject to the Kiddie Tax has unearned income above $2,700, someone has to file Form 8615 to compute the tax. Because 1099s are issued under the child’s Social Security number, the reporting obligation follows the child, and the custodian usually handles it.
The Child’s Own Return With Form 8615
The standard path is a Form 1040 in the child’s name with Form 8615 attached. The form requires the parent’s Social Security number and filing status, because the calculation lifts the child’s net unearned income onto the parent’s taxable income to find the correct rate.2Internal Revenue Service. Instructions for Form 8615 The form then compares the tax at the child’s rate to the tax at the parent’s rate, and the child owes whichever is larger.
The Parent’s Election With Form 8814
Parents can instead elect to report the child’s income on their own return using Form 8814, but only when three conditions are met: the child’s income is entirely interest, dividends, and capital gain distributions; the child’s gross income for 2026 is between $1,350 and $13,500; and the child isn’t filing a joint return.5Internal Revenue Service. Instructions for Form 8814
Form 8814 is simpler, but not always cheaper. Adding the child’s income raises the parent’s adjusted gross income, which can trigger phaseouts on credits and deductions and can nudge the parent into a higher bracket on their own income. For families sitting near an AGI cliff for education credits or similar benefits, the convenience of Form 8814 can cost more than it saves.
The 3.8% Net Investment Income Tax
A child subject to the Kiddie Tax can also owe the 3.8% Net Investment Income Tax on their unearned income if their modified adjusted gross income is above $200,000.4Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) Most children never reach that threshold. A large UTMA funded with appreciated stock is where it matters: a single big sale in one year can push the child’s MAGI over $200,000 and stack the 3.8% surcharge on top of the regular Kiddie Tax.
What Changes When the Child Ages Out
The Kiddie Tax stops once the child no longer meets the age and dependency tests. At the age of majority set by state law, which ranges from 18 to 25 depending on the state and the terms of the original transfer, the custodian transfers the assets to the beneficiary.6Social Security Administration. SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA)
From that point on, all investment income is taxed at the young adult’s own marginal rate. For someone in the early years of a career, that’s often 10% or 12%. A 23-year-old with modest wages who sells appreciated stock from the account may owe little or nothing in capital gains tax.
Cost basis does not reset at transfer. Whatever the custodian paid for an investment is the basis the adult inherits. If $10,000 grew to $40,000, the adult owes capital gains tax on the $30,000 gain when they sell. Keeping records of original purchase dates and prices matters, because reconstructing them years later is hard once the custodian is no longer involved.