Rates for Taxing Unearned Income for Children (aka Kiddie Tax)

The Federal Income tax rates change each year. 

New tax rates/schedules are issued by the IRS for the coming year.

Recently issued, the major tax publishing company, Thomson Reuters West (our Real Estate Transactions book has been with West for over 50 years) calculated the inflation adjusted income tax rates for 2027.  With such adjustment, the rates calculated for children on their income, known as the Kiddie Tax, were issued.

The rates vary depending on the income of the child.  In essence, under the new 2027 position, the tax rates for the child’s income under Internal Revenue Code Section 1 (g) are:

For the first $1400 of income, there is no tax as this ties to the standard deduction for the child.

The next $1400 is taxed at the child’s marginal income tax rate which is normally very low; it is almost always lower than the rate of the parents of the child.

If the income is in excess of $2,800, the rate to use is the parents' tax rates, assuming they are higher than the child’s rate. 

These rules generally apply to a dependent child that is under the age of 18 years.  (There are other special rules when the child is deemed a full-time student.)

Parents and children need to be aware of these potential tax issues for children, especially as the child’s income increases from assets producing income, and other sources of unearned income.

There are also other options for reporting the income of the child on the parents’ return, if the child meets certain requirements.  For more on this issue, see IRS forms 8615 and 8814.

By

Dr. Mark Lee Levine, Professor, University of Denver.