The beginning of each year is a great time to start next year’s tax planning. One area to help reduce your tax obligation, that benefits from an early in the year start, is leveraging your kids to the fullest using the kiddie tax rules.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2025 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,700 be taxed at their parent’s tax rate.

Applies to

• Children under the age of 19
• Full-time students under the age of 24 and providing less than half of their own financial support
• Children with unearned incomes above $2,700

Who/What it does NOT apply to

• Earned income (wages and self-employed income from things like babysitting or paper routes)
• Children that are over age 18 and have earnings providing more than half of their support
• Children over age 19 that are not full-time students
• Gifts received by your child during the year

How it works

• The first $1,350 of unearned income is generally tax-free
• The next $1,350 of unearned income is taxed at the child’s (usually lower) tax rate

The excess over $2,700 is taxed at the parent’s rate either on the parent’s tax return

Planning thoughts

So while your child’s unearned income above $2,700 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Create accounts in your child’s name. Establish a Uniform Transfers to Minor Act (UTMA) account at your favorite bank and/or investment institution. This will allow you to manage assets in the name of a minor child. Then gift cash or investments into the account. Gains and interest in the UTMA account will now create unearned income in the name of the child. Be aware of annual gift limits to keep reporting simple (currently $19,000 per individual per year in 2025). Build these accounts to provide up to $2,700 in unearned income each year.

Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.

Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.

Leverage gift giving. Each year, if your children are not maximizing tax-free investment income consider gifting additional funds to allow for unearned income up to the kiddie tax thresholds.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful as your child reaches their legal adult age, this part of the tax code can create an unwelcome surprise if not handled properly.

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Small Business ALERT:

Department of Justice FinCEN Judicial order is overturned.

What this means. All firms must register their beneficial owners (BOI) through the FinCEN application as originally dictated by the law. The law was ruled an overreach by a judicial order earlier this month, but in an emergency ruling the Justice Department got the order overturned. The original filing deadline of 12/31/24 is now extended to 1/13/25. If you are a small business and have not registered your owners you will need to ensure you comply. Go to www.FinCEN.gov and review the information.