How To Avoid Kiddie Tax

Avoiding or minimizing the Kiddie Tax requires careful planning. The Kiddie Tax is a U.S. tax rule designed to prevent parents from shifting investment income to their children to take advantage of lower tax rates. Here’s how it works and how to legally reduce or avoid it:

📘 What Is the Kiddie Tax?

Applies to unearned income (e.g., dividends, interest, capital gains) of a child under age 19 (or under 24 if a full-time student and dependent).
For 2024:
- First $1,300 of unearned income: tax-free (standard deduction for dependents)
- Next $1,300: taxed at child’s rate
- Above $2,600: taxed at parents’ tax rate

✅ Legal Ways to Avoid or Reduce the Kiddie Tax

1. Stay Under the $2,600 Unearned Income Limit

Keep the child’s investment income under this threshold annually.
Use tax-efficient investments like growth stocks or ETFs that don’t pay regular dividends.

2. Invest in Tax-Deferred or Tax-Free Accounts

529 college savings plans – growth and withdrawals for education are tax-free.
Roth IRA (if child has earned income) – no taxes on growth or withdrawals in retirement.
Series I U.S. Savings Bonds – tax-deferred and potentially tax-free if used for education.

3. Gift Growth-Oriented Assets

Give children assets (e.g., stocks) rather than income-generating investments.
Long-term appreciation is not taxed until sold, and children may sell at a lower capital gains rate when older (after Kiddie Tax no longer applies).

4. Use the Child’s Earned Income

The Kiddie Tax only applies to unearned income.
Encourage children to earn money through part-time jobs or self-employment.
Earned income is taxed at normal (lower) child rates.

5. Time Asset Sales Carefully

Delay selling appreciated assets until the child is over 19 (or 24 if a student).
Spread out gains across multiple years to stay under the Kiddie Tax threshold.

6. Use UTMA/UGMA Accounts Wisely

These accounts are popular for gifting to children but are subject to Kiddie Tax.
Use for low-income-producing investments or plan to use the funds for qualified expenses while child is young.

7. Consider Shifting to 529 Plans

If you have an UTMA/UGMA account, consider liquidating and transferring (where allowed) to a 529 plan, which avoids ongoing unearned income tax and is education-friendly.

🚫 What NOT to Do

Don’t transfer large, income-generating assets directly to children thinking it will lower taxes — this often triggers the Kiddie Tax and defeats the purpose.

📌 Summary Table

Strategy	Avoids Kiddie Tax?	Notes
Keep income < $2,600	✅ Yes	Simple but may limit growth
529 plan	✅ Yes	Best for education expenses
Roth IRA (with earned income)	✅ Yes	Great long-term savings
UTMA with growth stocks	⚠️ Maybe	Depends on income level
Give assets, not income	✅ Yes (if held)	Defer gains until later
Use tax-efficient funds	✅ Yes	Avoid dividends and turnover