Definitions of Kiddie Tax
Child
The term "child" includes a legally adopted child and a stepchild. The rules apply whether or not the child is a dependent. However, the rules don’t apply if:
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The child isn’t required to file a tax return, or
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Neither of the child's parents were living at the end of the tax year.
Unearned Income
For purposes of the Kiddie Tax, unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest (reduced by any penalty for early withdrawal of savings), dividends (including capital gain distributions), capital gains and losses, rents, royalties, etc. It also includes the taxable part of social security benefits, pension and annuity payments, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, taxable alimony, and income (other than earned income) received as the beneficiary of a trust.
Income subject to the kiddie tax includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
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Non-taxable unearned income - such as tax-exempt interest and the non-taxable part of social security and pension payments, is not included as unearned income., However, a child's unearned income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.
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Exception for income from qualified disability trusts – If a child is the beneficiary of a qualified disability trust (as defined in Code Sec. 642(b)(2)(C)(ii)), any amount distributed from the trust that is includible in the child’s income is considered earned income for purposes of the Kiddie Tax computation.
Net Unearned Income
If the child is not itemizing deductions, subtract $2,700 for 2025 ($2,600 for 2024) from unearned income to figure net unearned income for purposes of the Kiddie Tax. If the child itemizes, the amount to subtract is the larger of $2,700, or $1,350 plus the portion of Schedule A deductions that are directly connected with producing the unearned income. The amounts for 2024 are $2,600 and $1,300, respectively.
Itemized Deductions
For this computation, itemized deductions directly connected with the production of unearned income include expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing unearned income. These expenses also could include custodian fees and service charges on bank or brokerage accounts, service fees to collect taxable interest and dividends, and certain investment counsel fees. These expenses are claimed as Schedule A Tier 2 miscellaneous deductions subject to reduction by 2% of AGI. The deduction for these expenses is suspended for years 2018 through 2025, so it is highly unlikely that a child subject to the Kiddie Tax rules will be itemizing during this period.