The Kiddie Tax (Section 1(g))

How it works

Section 1(g) is not a strategy to use. It is a constraint every family with a minor or young-adult dependent needs to understand before deciding how to hold investment assets in a child's name. The provision exists because parents used to move dividend-paying stock, bonds, and mutual funds into a child's name so that income would be taxed at the child's own low bracket instead of the parent's. Section 1(g) answers that by taxing a qualifying child's net unearned income above an annual floor as if it were the parent's own top dollar, at the parent's marginal rate, computed on Form 8615 and attached to the child's own Form 1040.

The whole mechanism turns on one distinction: what counts as earned income and what counts as unearned income. Unearned income is what section 1(g) reaches: interest, dividends, capital gains, rents, royalties, taxable Social Security or pension amounts, taxable scholarship income not used for tuition, distributed trust income, and income thrown off by a custodial account held under a state's UTMA or UGMA statute. Earned income sits entirely outside the computation: wages, salary, W-2 compensation, and net self-employment earnings for services a child actually performed, defined by reference to section 911(d)(2). A child can earn a substantial W-2 paycheck for real work and none of it enters this calculation, while the same dollar as a brokerage dividend does.

When a child does have net unearned income above the floor, the arithmetic is not self-contained on the child's own return. Form 8615 requires the parent's own taxable income and filing status to find the rate that applies, and when a parent has more than one child subject to section 1(g) in the same year, their net unearned income is combined to find that rate under section 1(g)(3), and the resulting tax is then allocated back to each child pro rata.

What this means in Florida

Florida has no individual income tax, so section 1(g) is a federal question only for a Florida family. There is no state-level version of this rule sitting alongside it, and no state exclusion that offsets it. Whatever a Florida family owes under this provision, it owes to the IRS alone; the state return is simply not part of the analysis.

Who this applies to

Section 1(g) applies to a child for a given year only when every one of several conditions holds at once, and the age and support test is the one that gets misread most often.

The age and support test has three branches, and a child needs to land in only one:

• Under age 18 at the end of the year, regardless of how much the child earns.
• Age 18 at year-end, but only if the child's own earned income did not exceed half of the child's own support for the year.
• Age 19 through 23 at year-end and a full-time student for at least five months of the year, again only if earned income did not exceed half of the child's own support.

The practical reach is narrower than the usual "under 24" shorthand suggests. A child under 18 is caught no matter how self-sufficient they are; there is no support carve-out at that age. An 18-year-old, or a full-time student from 19 through 23, escapes only by actually covering more than half of their own support with earned income. A working teenager with a part-time job and modest investment income is usually still inside the rule; a genuinely self-supporting young adult is outside it entirely, regardless of investment income.

Three further conditions apply beyond the age test, and all three have to be true:

• At least one of the child's parents is alive at the end of the year.
• The child does not file a joint return for the year.
• The child's net unearned income for the year exceeds the annual floor; below that amount, section 1(g) produces no additional tax regardless of how the other tests come out.

What it requires

Once a child clears the age, support, and living-parent gates, what section 1(g) actually taxes runs in layers. The dollar figures anchoring those layers are adjusted for inflation each year but have landed on the same numbers for 2025 and 2026.

That $1,350 floor comes from the dependent's limited standard deduction under section 63(c)(5), and the reduction amount built into section 1(g)(4) borrows the same figure. A dependent child's own standard deduction is the greater of that floor or the child's earned income plus $450, capped at the regular single filer's standard deduction, which lets a child with real wages absorb far more at the first layer than one with only investment income.

A parent may instead elect, under section 1(g)(7), to report a child's income directly on the parent's own return using Form 8814, but only when the child's entire gross income is limited to interest, dividends, and capital gain distributions, the combined total stays under $13,500 for 2025 and 2026, and the child had no withholding or estimated payments and files no return of their own. Making that election folds the income into the parent's own adjusted gross income rather than the child's, which can push that adjusted gross income up far enough to phase out other items on the parent's return, among them the education credits.

None of this reaches earned income. A child's W-2 wages or net self-employment earnings for actual work never enter the section 1(g) computation, are never aggregated with a sibling's, and are taxed under the child's own bracket using the child's own, typically much larger, standard deduction.

What you need to document

Section 1(g) is a computation the IRS can reconstruct from the outside using nothing but 1099s filed under the child's own Social Security number, which is exactly why the file behind it matters.

The character and source of every item of unearned income

The 1099-DIV, 1099-INT, and 1099-B forms, and any K-1 showing distributed trust income, tied to the specific account or asset that produced it. Section 1(g) turns on what kind of income this is, not only how much of it there is.

A support computation, when the 18-to-23 bracket is in play

A record of the child's total support for the year and what share of it the child's own earned income covered. It is what decides whether an 18-year-old or a full-time college student is inside or outside section 1(g) at all, and assuming a working 18-to-23-year-old is automatically outside it is the common error here.

The parent's own return details behind Form 8615

The taxable income and filing status Form 8615 relies on, and, when more than one child is subject to section 1(g) in the same year, the worksheet showing how the combined unearned income was allocated back to each child.

Real substantiation for any wages paid instead

Time records, a description of the actual duties performed, and evidence the pay is comparable to what an unrelated employee would receive for the same work. This file is what separates genuine earned income from a reclassification the IRS can unwind, and it matters more than anything else on this list.

The basis for a Form 8814 election, if one is made

Proof the child's income was limited to interest, dividends, and capital gain distributions, that the combined total stayed under the applicable cap, and that the child had no withholding or estimated payments and filed no separate return.

Where it goes wrong

Section 1(g) itself is not an aggressive position. It is a mandatory computation, not an election or a shelter, and there is nothing to disclose or defend about the rate table on its own. Where an examination actually lands is in the planning built around it, and overwhelmingly that means the choice to convert what would have been unearned income into wages.

The wage-conversion exposure

Paying a child instead of letting income sit in a custodial account is not, by itself, a problem; wages for real work are earned income, and section 1(g) does not reach them at all. The risk sits in a wage that does not correspond to real work. The line of authority represented by Eller v. Commissioner treats family employment the same as any other: the pay has to be for bona fide services, at a reasonable amount for what was actually done. A salary invented purely to move income off the section 1(g) table gets recharacterized, and the deduction that went with it on the business side goes with it. Whether that arrangement is even the right way to classify the child's work, employee rather than something else, is its own question, one I get into in my 1099 vs. W-2 guide.

• Treating a job as proof, rather than the support test. An 18-to-23-year-old with any earned income is not automatically clear of section 1(g). The test is whether that earned income exceeded half of the child's own support, and skipping that computation is the most common eligibility mistake.
• Skipping Form 8615 entirely. Failing to file 8615 when a child's unearned income exceeds the floor understates the tax, and the IRS matches 1099 income reported under the child's own Social Security number. Fixing it after the fact means an amended return, and if the gap produced an underpayment penalty, the reasonable-cause relief covered in my penalty abatement guide is worth examining before assuming the penalty stands.
• Electing Form 8814 out of convenience. Folding a child's income onto the parent's own return can push adjusted gross income into a range that trims other items, and it gives up the child's own two lower layers. It is rarely the better choice once the amounts are more than trivial.
• Realizing a large gain inside the account at the wrong time. A large capital gain recognized while a child is still inside section 1(g) is taxed at the parent's rate. The identical gain recognized after the child ages out, or stops being a full-time student, is taxed at the child's own, usually lower, rate instead.
• Missing the AMT interaction. A child subject to section 1(g) carries a reduced alternative minimum tax exemption, limited to the child's own earned income plus a fixed add-on figure under section 59(j), set at $9,750 for 2026. A custodial account with a large one-time gain can push a child into AMT territory in a way that is easy to miss until the return is actually prepared.

A situation where this comes up

The version I see most often is a custodial brokerage account that has been sitting quietly for years, funded by gifts from grandparents or the parents themselves back when the child was small. Nobody has been checking its annual dividends and interest against the section 1(g) floor, because for most of the account's life the amounts involved were too small to matter. Then the account grows, or the market has a strong year, and the family discovers at tax time that a meaningful slice of what looks like a routine 1099 is taxed at their own top rate rather than the child's.

A closely related version involves a college-age child, 19 through 23, where a parent assumes a summer or part-time campus job is enough on its own to clear section 1(g). It usually is not: the test is whether that income covers more than half of the child's own support, and a part-time wage rarely clears that bar when tuition, housing, and living costs are still being paid by the parents.

The version that concerns me more starts from the answer instead of the facts: a family hears that wages sit outside section 1(g) entirely and decides to put a child on the business payroll at a number chosen to offset the account's investment income, for a role that does not actually exist. That is the exact fact pattern the wage-conversion exposure above is built around, and what makes it visible from the outside is that the paperwork was built to fit a number, rather than the number reflecting what was actually done.