Lana Oconnell
College students dabbling in stocks or cryptocurrency may trigger the kiddie tax, resulting in a surprise tax bill for their parents. The kiddie tax is an additional levy for parents once their child's investment income—capital gains, dividends, and interest—exceeds a certain threshold. This threshold varies by year, but in 2025, the first $1,350 of unearned income is untaxed, the next $1,350 is taxed at the child's marginal rate, and anything above $2,700 is taxed at the parents' marginal rate. If a student has no income, short-term capital gains are taxed as ordinary income, and long-term capital gains are taxed at 15% for gains over $2,500.
| Characteristics | Values |
|---|---|
| Who does the tax apply to? | Dependent children under the age of 18 or full-time students younger than 24 |
| Tax name | Kiddie tax |
| Tax rate | First $1,100 is tax-free, the next $1,100 is taxed at the child's rate, and anything above $2,200 is taxed at the parents' rate |
| Form to fill | Form 8615 |
| Other ways to avoid the tax | Invest in an individual retirement account or stick with tax-friendly assets |
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What You'll Learn
'Kiddie tax'
The "kiddie tax" is a tax imposed on income unrelated to employment earned by individuals aged 18 or younger, or dependent full-time students under 24. It was introduced as part of the Tax Reform Act of 1986 to prevent parents from registering investments in their children's names to benefit from lower tax rates. The kiddie tax threshold is adjusted annually for inflation. For example, in 2023, unearned income surpassing $1,250 was subject to the child's tax rate, and anything above $2,500 was taxed at the guardian's rate.
The kiddie tax includes unearned income a child receives, such as interest, dividends, capital gains, rent, and royalties. Any salary or wages the child earns are not subject to the kiddie tax. The tax applies to dependent children under 18 or full-time students under 24. The first portion of unearned income is covered by the standard deduction and is not taxed. The next portion is taxed at the child's marginal tax rate, and anything above this threshold is taxed at the parent's marginal income tax rate.
For example, if a 22-year-old college student earned $5,000 from investing, the first $1,100 would be tax-free, and the student would owe levies on the next $1,100 at their rate. Any profit above $2,200 would be subject to the kiddie tax, charged to the parents at their rate, assuming the student is a dependent.
To report a child's unearned income, Form 8615 "Tax for Certain Children Who Have Unearned Income" must be filled out. If the child's only income is interest and dividend income and totals less than $13,000, the parents may include that income on their tax return rather than filing a separate return for the child. Form 8814, "Parents' Election to Report Child's Interest and Dividends," can be attached to the parents' Form 1040 to make this election.
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Tax-free investments
Whether or not college students pay taxes on stocks depends on their age and dependency status. If a student is under 18 or a full-time student between the ages of 19 and 24 with no income, any gains over $2,500 will be taxed at their parents' rate. This is known as the "kiddie tax".
There are several tax-free investment options available for college students. These include:
529 Plans
These are education savings plans offered by nearly every state. They are flexible, tax-advantaged accounts designed for college savings. While your money is in the account, no taxes will be due on investment earnings. Withdrawals for qualified education expenses are also free from federal income tax. However, non-qualified withdrawals are subject to federal and state income taxes, as well as a 10% federal penalty.
Coverdell IRAs
These education savings accounts allow contributions of up to $2,000 per year into any investment vehicle. While contributions are not tax-deductible, the money can be used for educational expenses at any level, including college.
Roth IRAs
These are typically used as retirement investments. In order for investment distributions to be tax-free, the withdrawal must be made as a distribution of principal at least five years after the account was created. If the account is at least five years old and the account owner is 59 1/2 or older, distributions are tax-free regardless of whether they are a withdrawal of principal or earnings.
Tax-Exempt Interest Income
Certain state and municipal bonds provide tax-exempt interest income. Exempt-interest dividends as a shareholder in a mutual fund or other regulated investment company are also non-taxable.
It is important to carefully review the rules and regulations surrounding each type of account before making any investments or withdrawals.
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Tax forms
The tax forms that college students need to fill out depend on their income, whether they are claimed as dependents, and the sources of their income. Here are some of the relevant tax forms for college students:
- Form W-2: This form is received from an employer and reports income and any taxes withheld. College students who work part-time or full-time jobs will typically receive this form.
- Form 1099: This form reports income from freelance work, dividends, interest, or capital gains from investment brokerage firms or banks. College students with income from investments or freelance work may receive this form.
- Form 1098-T: This form shows the tuition fees paid by the student in a given year.
- Form 1098-E: This form reports any student loan interest payments made by the student. This form is important for claiming deductions on student loan interest.
- Form 8863: College students can use this form to calculate and claim education credits, such as the American Opportunity Credit or the Lifetime Learning Credit.
- Form 8843: International students with no income in the US must complete this form and send it to the IRS to report their lack of income.
- Form 8615: If a college student has unearned income (such as investment income) above a certain threshold, they may need to file this form to calculate their tax on unearned income. This form is often associated with the "kiddie tax," where the student's gains are taxed at their parents' rate.
It is important for college students to carefully review their income sources, deductions, and credits to determine which tax forms are relevant to their specific situation. Additionally, they can seek guidance from their college's financial education programs or the IRS's Volunteer Income Tax Assistance (VITA) program.
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Tax on short-term capital gains
If you are a college student with no income, you may still have to pay taxes on any short-term capital gains. Short-term capital gains refer to profits made from selling assets held for a year or less. These are typically taxed at the same rate as your ordinary income, which can be anywhere from 10% to 37% depending on your income and filing status.
If you are 18 or younger, or a full-time student between the ages of 19 and 24, you will need to fill out a Form 8615 "Tax for Certain Children Who Have Unearned Income". Any gains in excess of $2,500 or $2,600 will be taxed at your parent's or guardian's rate.
There are a few ways to reduce your tax bill. For example, you could hold your assets for longer than a year to benefit from a reduced tax rate. Alternatively, you could invest in a Roth individual retirement account (IRA) or other tax-advantaged accounts, such as 401(k)s, 529s, and Health Savings Accounts (HSAs). You will not incur taxes on these accounts until you start making withdrawals.
It is important to note that the information provided here may not be exhaustive and may not apply to your specific situation. For specific tax advice, it is recommended to consult with a tax professional.
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Tax on long-term capital gains
If you are a college student with no income, you may still have to pay taxes on any capital gains you make from stocks. Capital gains refer to the profit made from selling a capital asset, such as stocks, for more than you bought it. These gains can be classified as either short-term or long-term, and the tax rates for each type vary.
Long-term capital gains taxes are typically more favourable than short-term gains taxes. Long-term capital gains taxes range from 0% to 20%, while short-term capital gains taxes can be as high as 37%. Additionally, certain investments, such as collectibles, may be taxed at a higher rate for long-term capital gains. It is important to note that tax rates may change over time, and you should refer to the most recent tax information available.
If you are a college student with no income, your gains from stocks may be subject to the "kiddie tax". This tax applies to children under the age of 18 or under the age of 24 if they are full-time students. The "kiddie tax" is an additional levy on the parents' taxes once the child's investment income, including capital gains, exceeds a certain threshold. The threshold for 2025 is $2,600, and any gains above this amount may be taxed at the parents' rate.
To determine the tax on long-term capital gains, you need to consider the original cost of the investment, any adjustments such as fees and commissions, and your overall income level. By holding assets for longer, you may be able to take advantage of lower long-term capital gains tax rates. Additionally, certain accounts, such as Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs), offer tax advantages, allowing investments to grow tax-free or tax-deferred.
It is important to note that the information provided here may not cover all the complexities of taxes on long-term capital gains for college students. Tax laws can be complex and ever-changing, so it is always advisable to consult with a tax professional or advisor who can provide personalized guidance based on your specific circumstances.
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Frequently asked questions
College students may have to pay taxes on stocks due to the "kiddie tax". This is an extra levy for parents once their child's investment income—capital gains, dividends, and interest—exceeds a certain threshold.
The "kiddie tax" is a tax on a child's investment and other unearned income. It was passed to discourage wealthier individuals from transferring assets to their children to take advantage of their lower tax rates.
The first $1,100 to $1,350 is tax-free. The next $1,100 to $1,350 is taxed at the child's marginal tax rate. Anything above $2,600 to $2,700 is taxed at the parents' marginal tax rate.
You can pay the "kiddie tax" by filling out Form 8615 or Form 8814.
You may be able to avoid the "kiddie tax" by investing in an individual retirement account or sticking with tax-friendly assets.
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