A $15,000 Custodial Account Gets Taxed at YOUR 37% Bracket, Not Your Kid's
We ran a $15,000 custodial brokerage account through the calculator for parents in the 37% federal bracket. The intuitive assumption — a child with no other income should be taxed at their own low bracket — doesn’t hold once the account is large enough. Of the $15,000 in unearned income, $12,300 (everything above the $2,700 threshold) gets taxed at the parent’s marginal rate. Only the first $2,700 gets any benefit from the child’s own, lower bracket.
The three bands, applied
| Band | Amount | Tax rate |
|---|---|---|
| $0 – $1,350 | $1,350 | 0% (tax-free) |
| $1,350 – $2,700 | $1,350 | Child’s own rate |
| Above $2,700 | $12,300 | Parent’s marginal rate |
The math is a stack, not an average — the first $2,700 always gets the favorable treatment regardless of how large the account grows, but every dollar above that point is taxed as if it were the parent’s own income. For a household in a high bracket, that means the vast majority of a meaningfully-sized custodial account’s investment income is taxed at rates far above what the child would owe filing independently.
Why this surprises people who set up the account years ago
Custodial accounts are often opened when a child is very young, with the general goal of “saving for their future” — the kiddie tax rules rarely factor into that initial decision, and the account’s growth compounds for years before anyone checks whether it’s crossed the threshold. By the time a $15,000+ balance is generating real dividend and interest income, the tax treatment has quietly shifted from “negligible, the kid’s own low bracket” to “mostly taxed at the parents’ top rate” — a gradual change that doesn’t announce itself the way a policy change or a new tax law would.
Where the “shift income to kids” strategy still works
- Small accounts stay entirely below the threshold. An account generating under $2,700/year in unearned income owes little to no kiddie tax regardless of the parent’s bracket — the basic strategy still works at modest scale.
- 529 plans sidestep this entirely. Growth inside a 529 education savings account is tax-deferred, and qualified withdrawals are tax-free — it never generates the unearned income the kiddie tax calculation applies to in the first place.
- The child’s own earned income isn’t touched. Wages from an actual job, including reasonable pay from a family business, are taxed at the child’s own bracket no matter the amount — this is a completely separate rule from unearned income.
- Once the child files independently as an adult, the kiddie tax generally stops applying (subject to the age and support tests for full-time students up to 23).
What to actually do
- Check whether your child’s custodial account is generating unearned income above $2,700/year — below that, kiddie tax exposure is minor.
- For education-earmarked savings, consider a 529 plan instead of (or in addition to) a taxable custodial account — it sidesteps this calculation entirely.
- For accounts already large enough to matter, consider tax-efficient holdings — broad index funds with low turnover, or municipal bonds where appropriate — to reduce the unearned income exposed to kiddie tax.
- Don’t conflate a child’s job wages with unearned income in your planning — they’re taxed completely differently.
- Confirm the exact filing requirement and applicable rates with a tax professional, especially the first year a custodial account crosses the threshold.
For the education-savings alternative that avoids this issue entirely, see why starting a college fund now beats waiting, and for how the parent-rate portion interacts with the household’s own bracket, see the marginal vs effective tax rate myth.
Open the Kiddie Tax Calculator → and run your own child’s account balance and your marginal rate.