Kiddie tax

Taxation in the United States
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The Kiddie Tax is a U.S. federal tax rule under Internal Revenue Code § 1(g) that applies to certain unearned income of children. It taxes a child’s investment and other passive income, such as interest, dividends, capital gains, rental income, royalties, and some pension or trust income — at their parents’ marginal income-tax rate, instead of at the child’s lower rate.

The rule was enacted by the Tax Reform Act of 1986 to prevent families from circumventing higher tax brackets by shifting investment income into a child’s name, given children often face lower tax rates.