How to Avoid the Kiddie Tax When Gifting to Grandkids

How to Avoid the Kiddie Tax When Gifting to Grandkids

Gifting to your grandkids can be one of the most fulfilling parts of a financial plan. But if you’re not careful, it can come with an unexpected price tag: the Kiddie Tax.

While the gift itself may be tax-free, the unearned income it generates could be taxed at your tax rate, not theirs.

Here’s what to know before you transfer appreciated stock or income-producing assets to the next generation.

What Is the Kiddie Tax?

The Kiddie Tax is a federal rule that applies to unearned income, like dividends or realized capital gains, received by:

• Children under 18, or
• Full-time students between 18 and 23 who are still financially dependent

It was created to discourage parents and grandparents from shifting income-generating assets to children in lower tax brackets just to reduce taxes.

Gifting ≠ Income Tax

Here’s the key distinction:
The Kiddie Tax does not apply to the gift itself, it applies to the unearned income generated by the gift.

So, if you gift $10,000 of Apple stock to your 17-year-old grandson:

• No tax considerations on the gift (under $19,000 annual gift exclusion)
• But if the stock pays dividends or is later sold at a gain above the original cost basis, part of that income may be taxed at your tax rate (not your grandchild’s)

How the Kiddie Tax Works (2025)

For 2025, the Kiddie Tax applies as follows:

The $2,700 limit resets annually and applies per child.

How to Minimize or Avoid the Kiddie Tax

Here are several tax-savvy ways to gift without triggering Kiddie Tax headaches:

Use 529 Plans Instead

Gifts to a 529 college savings plan grow tax-free — and withdrawals for education aren’t taxed.
They completely sidestep Kiddie Tax, making them ideal for grandparents saving for college.

You can also front-load up to $95,000 per child (in 2025) with 5-year gift splitting.

Wait Until They’re 24+

The Kiddie Tax no longer applies once the child turns 24 and is no longer a dependent.

That means if your grandchild is holding appreciated stock and waits to sell, the income will be taxed at their rate, not yours.

If they’re in a low-income year (e.g. just out of college), they might even fall into the 0% capital gains bracket.

Gift Growth Assets, Not Income Assets

To limit unearned income, gift stocks that are focused on capital appreciation, not dividends.

Here’s an example:

You gift your 18-year-old son $5,000 in a stock that pays no dividend. It grows to $10,000, but he waits until age 24 to sell it.

At that point, he’s no longer subject to the Kiddie Tax — and if he’s in the 0% capital gains bracket, he pays no tax on the $5,000 gain.

Open a Custodial Roth IRA (If They Have Earned Income)

If your grandchild has a part-time job, you can help them open and contribute to a Custodial Roth IRA up to the amount they earned that year.

These accounts grow tax-free, and because the contributions are based on earned income (not investment income or gifts), the Kiddie Tax doesn’t apply.

Final Thoughts

Gifting can be a powerful legacy tool, but skipping the fine print can lead to unwanted tax surprises.
Understanding how the Kiddie Tax works, and when it applies, can help you make smarter decisions when transferring wealth to future generations.

At Strategic Wealth Partners, we help clients build tax-savvy plans that align with their long-term legacy goals.

Book a meeting below to explore how gifting strategies can fit into your retirement and estate plan.

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