How do dependents report unearned income on their 2025 tax returns?

A dependent with unearned income in 2025 may be required to file their own federal tax return and, if that income exceeds $2,700, must attach Form 8615 to calculate the "kiddie tax" — a rule that taxes the excess at the parent's marginal rate rather than the child's lower rate. In limited circumstances, parents may instead report a qualifying child's unearned income on their own return using Form 8814.

Step 1 — Does the Dependent Have a Filing Requirement?

For 2025, a dependent must file a federal return if:

• Unearned income only: Gross unearned income exceeds $1,350 (the dependent standard deduction).
• Earned income only: Earned income exceeds $15,000.
• Mixed income: Total gross income exceeds the greater of (a) $1,350 or (b) earned income up to $14,550 plus $450. (e.g., "a dependent with $9,000 in earned income must file if total gross income exceeds $9,450")

Step 2 — What Counts as Unearned Income?

Unearned income is all income other than wages, salaries, tips, and compensation for work performed. It includes:

• Taxable interest and ordinary dividends
• Capital gains and capital gain distributions
• Rental and royalty income
• Taxable scholarship and fellowship grants not reported on Form W-2
• Taxable pension, annuity, and trust distributions
• Unemployment compensation (in certain circumstances)

NOTE

Scholarships covering qualified tuition and fees are excluded from income. The taxable portion — amounts used for room, board, or other non-qualified expenses — is generally unearned income for kiddie tax purposes under IRC §117.

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Step 3 — Does Form 8615 (Kiddie Tax) Apply?

Form 8615 must be attached to the dependent's Form 1040 if all five of the following conditions are met:

• Unearned income exceeded $2,700 in 2025;
• The child is required to file a tax return;
• Age requirement — one of the following: (a) under age 18 at December 31, 2025; (b) age 18, and earned income did not exceed half of support; or (c) full-time student age 19–23, with earned income that did not exceed half of support;
• At least one parent was alive at December 31, 2025;
• The child does not file a joint return.

How Unearned Income Is Taxed Under Form 8615

Note: Qualified dividends and long-term capital gains: Even when the third-layer amount is taxed at the parent's marginal rate, the favorable capital gain rates (0%, 15%, 20%) still apply to qualifying income. The kiddie tax borrows the parent's bracket — it does not convert investment income into ordinary income.

Alternative: Form 8814 (Parent's Election)

Parents may elect to report a child's unearned income on their own Form 1040 using Form 8814, but only if all of the following apply:

• The child's unearned income consisted only of interest, dividends, and/or capital gain distributions;
• Total gross income was less than $13,500 for 2025;
• No estimated tax payments were made in the child's name;
• No federal income tax was withheld on the child's income.

Under Form 8814, the first $1,350 of the child's income is excluded; income above $1,350 is added to the parent's return and taxed at the parent's rate. This avoids filing a separate return for the child but may push the parent into a higher bracket and affect AGI-sensitive credits or deductions.

Net Investment Income Tax (NIIT)

A dependent subject to Form 8615 who also has net investment income may owe the 3.8% Net Investment Income Tax under IRC §1411. NIIT is calculated at the child level, not the parent's, and applies to the lesser of (a) net investment income or (b) the excess of modified AGI over the threshold.

Kiddie tax calculations require coordinating both the parent's and child's returns. When a family has multiple children each filing Form 8615, each child's net unearned income must be cross-referenced with siblings. Deduction's CPAs and Taylor, CPAI helps you handle this coordination smoothly.

Sources:

IRC §1(g) - Kiddie Tax

IRS Form 8615 Instructions (2025)

IRS Topic No. 553 - Tax on a Child's Investment and Other Unearned Income

IRS Form 8814 - Parents' Election to Report Child's Interest and Dividends

IRC §1411 - Net Investment Income Tax