Kiddie Tax for College Students: When Investment Income Is Taxed at Parent Rates

The kiddie tax for college students is a surprise waiting to happen. Most parents and students assume the “kiddie tax” applies only to minor children, but it actually extends through age 23 if the student is a full-time college student. Investment income over a modest threshold is taxed at the parent’s marginal rate, not the student’s lower bracket. Scholarships and grants further complicate the math, because they reduce the threshold at which kiddie tax kicks in. Understanding these rules is essential for families managing education savings or student investments.

Who Is Subject to the Kiddie Tax: The College Years

The kiddie tax nominally applies to minor children under 18. But for full-time students aged 19–23, a second prong kicks in: if their investment income (unearned income) exceeds a threshold, it is taxed at the parent’s marginal tax bracket, not the student’s.

The child must be:

• A full-time student (defined as enrolled full-time for at least 5 months in the calendar tax year).
• Under age 24 at the end of the tax year.
• Not yet married (filing separately).
• A dependent of the parent on the parent’s return.

A 22-year-old sophomore working 15 hours a week qualifies. A 20-year-old senior on a gap year (not enrolled) does not. A 25-year-old graduate student does not, even if full-time. The rule is bright-line: full-time status and age.

The Unearned Income Threshold: The Numbers

For 2024, the kiddie tax threshold is $1,300 of unearned income (indexed annually for inflation). Here is how the brackets work:

• Unearned income up to $1,300: Taxed at the child’s rate (usually 10% federal, or 0% if the child has no other income and is in the zero capital gains bracket).
• Unearned income above $1,300: Taxed at the parent’s marginal rate.

Example: A college student receives $500 in dividends and $1,200 in long-term capital gains, totaling $1,700 of unearned income. The first $1,300 is taxed at the student’s rate (likely 10%). The remaining $400 is taxed at the parent’s rate—which could be 22%, 24%, or higher if the parent is a higher earner.

This is a tax penalty for high-earning parents. A student of a parent in the 35% bracket will pay 35% on investment income above $1,300—much more than the student’s own 10% or 12% bracket.

The Scholarship Complication: The Offset Rule

Here is where it gets tricky: net unearned income for kiddie tax purposes is reduced by scholarships and grants (but not loans or work-study).

The formula is:

Net Unearned Income = Unearned Income − Greater of [$1,300 OR (Scholarships + Grants − Tuition and Fees)]

Example 1: A student receives $2,000 in dividends and a $5,000 scholarship (applied to tuition). The tuition is $10,000. The calculation:

• Unearned income: $2,000
• Scholarships applied to tuition: $5,000
• Tuition and fees: $10,000
• Scholarship excess over tuition: $0
• Applicable offset: Greater of [$1,300 OR $0] = $1,300
• Net unearned income: $2,000 − $1,300 = $700 (taxed at student’s rate)

Example 2: Same student, but scholarship is $15,000 (and tuition is $10,000). The calculation:

• Unearned income: $2,000
• Scholarships: $15,000
• Tuition and fees: $10,000
• Scholarship excess: $15,000 − $10,000 = $5,000
• Applicable offset: Greater of [$1,300 OR $5,000] = $5,000
• Net unearned income: $2,000 − $5,000 = negative (all investment income sheltered)

So a generous scholarship can completely eliminate the kiddie tax by offsetting the unearned income threshold. This is a hidden benefit for scholarship winners.

How This Affects Student Investment Accounts

The kiddie tax rule creates planning pressure:

Before college: Parents often open custodial accounts (UGMA/UTMA) in a child’s name to capture the child’s standard deduction and low tax brackets. This works well for minors. But once the child enters college and the kiddie tax kicks in for ages 19+, the benefit reverses: new investment income is taxed at the parent’s rate. Some parents choose to stop contributing to child-owned accounts once the child turns 19 (if not in college), or to reposition into parent-owned accounts to avoid the tax.

Student 529 plans: A custodian parent can use a 529 plan (education savings account) to accumulate funds for college tuition and fees. Withdrawals for qualifying education expenses are tax-free—avoiding kiddie tax entirely. Many high-earning families use 529s specifically to dodge the kiddie tax on education savings.

Realized vs. unrealized gains: Kiddie tax applies to realized income (dividends, interest, capital gains). Unrealized appreciation does not trigger tax. A student holding a growth stock with gains is not taxed until the stock is sold. This creates an incentive for students to hold appreciating securities rather than harvest gains in their own names—a modest planning point, but real.

Coordination with Standard Deduction and Dependent Status

The student’s own standard deduction (2024: $14,600 for a single dependent) can shelter earned income (wages). But it does not shelter unearned income from kiddie tax—unearned income is still subject to the $1,300 threshold, regardless of how much the student earns in wages.

Example: A student earns $15,000 in wages and receives $2,000 in dividends. The student’s tax return shows:

• Wages: $15,000 (sheltered by standard deduction of $14,600; taxable income $400).
• Dividends: $2,000 (first $1,300 at student’s rate; $700 at parent’s rate due to kiddie tax).

The student owes tax on both. This is a common surprise: working hard at a part-time job does not exempt the student from kiddie tax on investments.

Phase-Out and Transition

The kiddie tax automatically expires at age 24 (or earlier, if the student drops to part-time or stops being a dependent). At age 24, a full-time graduate student is no longer subject to kiddie tax—all investment income is taxed at the student’s own rate, which is typically lower than the parent’s.

This creates a planning opportunity for some families: consider harvesting large capital gains in the student’s final year(s) as a dependent (years 19–23), taxing them at the student’s rate rather than the parent’s. Once the student turns 24 or drops dependent status, gains can be locked in at the student’s rate.

Planning and Disclosure

The kiddie tax must be reported on the parent’s tax return. There is no separate “kiddie tax form”—it is calculated on Schedule D or Form 8615, and the parent reports the kiddie-taxed income at the parent’s rate.

Students and parents should:

1. Estimate unearned income for the year and account for scholarships applied to tuition.
2. Decide account structure: Parent-owned accounts vs. child-owned custodial accounts. At 19+, parent-owned is often better to avoid kiddie tax.
3. Time large gains: Harvesting a big realized gain at age 23 (last year as dependent) may be preferable to age 24 (when student’s own rate applies anyway).
4. Monitor scholarship growth: A sudden increase in scholarships can reduce the kiddie tax burden significantly.

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