Custodial Account Taxes and the Kiddie Tax Explained

Who pays tax on a custodial account?

The child pays the tax on a custodial account, because the money is irrevocably theirs. When you open a UTMA or UGMA account, the assets legally belong to the minor even though an adult custodian manages them. That is different from a parent-owned brokerage account, where the parent reports the income.

Because the account is the child's, the income is reported under the child's Social Security number. But a low child's tax rate does not automatically apply to all of it. The kiddie tax exists to stop families from shifting large investment income to a child to dodge higher rates. For the basics of how these accounts work, see our UTMA custodial account guide.

The 2025 kiddie-tax brackets

The kiddie tax splits a child's unearned income into three tiers. For 2025, the tiers are:

- **First $1,350** of unearned income: tax-free (covered by the standard deduction). - **Next $1,350** (from $1,350 to $2,700): taxed at the child's own rate, which is usually 10%. - **Above $2,700**: taxed at the parents' marginal tax rate.

That top tier is the surprise for many families. Once a custodial account throws off more than $2,700 in a year, the excess is taxed as if the parents earned it — often 22%, 24%, or higher. So a well-funded, growth-heavy custodial account can create a yearly tax bill at the parents' rate, not the child's.

Earned vs unearned income — why it matters

The kiddie tax only applies to unearned income. Unearned income is money the child did not work for: interest, dividends, and capital gains from investments. A custodial account produces exactly this kind of income, which is why it is exposed to the kiddie tax.

Earned income — wages from a job or self-employment — is not subject to the kiddie tax. It is taxed at the child's own rate and gets its own standard deduction. This distinction is why a child with a real job can also fund a custodial Roth IRA, which needs earned income, while a custodial brokerage account never counts as earned income.

When does a child have to file a tax return?

A child generally must file their own return once unearned income tops $1,350 in 2025 (or when total income crosses the filing threshold). If the only income is investment income and it stays under that amount, no return is usually needed.

When a return is required, unearned income above the thresholds is figured on IRS Form 8615, which applies the parents' rate to the top tier. In some cases parents can instead report a child's interest and dividends on their own return using Form 8814 — but that can raise the parents' income, so run the numbers first. When in doubt, check the exact filing rules with a tax professional or the IRS.

How to keep the tax bill small

The simplest rule: keep the account's annual unearned income under the kiddie-tax threshold. If yearly interest, dividends, and realized gains stay below about $1,350, the income is effectively tax-free.

Practical moves:

- **Choose tax-efficient funds.** Broad index funds and ETFs throw off less taxable income than actively managed funds that trade often and distribute gains. - **Favor growth over payouts.** Funds that reinvest and pay small dividends defer taxes until you sell. - **Keep growth-heavy assets modest** inside a custodial account, or you invite a yearly bill at the parents' rate. - **Mind capital gains timing.** Selling appreciated holdings all at once can spike unearned income past $2,700.

If your goal is college and the tax hit worries you, a 529 grows tax-free for education — see 529 vs UTMA to compare the tradeoffs, and our best investment account for kids pillar for the full picture.

A worked example

Say a custodial account holds $60,000 and earns $3,000 of dividends and interest in 2025. The first $1,350 is tax-free. The next $1,350 is taxed at the child's 10% rate ($135). The final $300 — the amount above $2,700 — is taxed at the parents' marginal rate; at 24% that is $72.

The same $3,000 in a smaller, more tax-efficient account might have stayed under $1,350 and owed nothing. That gap is why fund choice and account size matter. Use our investment calculator to project how much income a given balance is likely to generate before you fund the account.

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