Why Your Teen’s Robinhood Gains Can Get Taxed at Your 35% Rate Under the Kiddie Tax
A teenager's custodial brokerage profits can quietly land in a tax bracket they have never heard of, one that mirrors whoever earns the most in the household. The rule has been on the books for decades, and Robinhood just handed…
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Your 16-year-old flipped a few positions in a Robinhood custodial account this year and cleared a few thousand in short-term gains. Congratulations. The top slice of those profits is now taxed at your marginal rate, not hers.
That is the kiddie tax working exactly as designed. It was written decades ago to stop parents from parking dividend-paying stocks and appreciated shares in a child’s name to arbitrage a lower bracket. Four decades later, it catches teenage traders on Robinhood (NASDAQ:HOOD | HOOD Price Prediction) whose parents never read a Form 8615 instruction in their lives.
How the Kiddie Tax Splits a Child’s Investment Income
The rule applies only to unearned income: interest, dividends, capital gains, and other passive investment income. It runs through age 18 automatically, and it extends through age 23 for a full-time student who provides less than half of their own support.
The structure is tiered. A first slice of the child’s unearned income for the year is covered by the dependent’s standard deduction and owes no federal tax. The next slice is taxed at the child’s own rate, typically 10%. Everything above that combined threshold gets taxed at the parents’ marginal rate. The tiered amounts are reported on Form 8615
That third tier is the trap. A teen sitting in the lowest bracket suddenly pays like the household’s highest earner on every extra dollar of gains.
What Household Income It Takes to Hit 35%
The 35% headline rate reflects the top of the kiddie-tax ladder, which mirrors the parents’ bracket. For tax year 2026, the 35% federal bracket applies to taxable income above $256,225 for single filers and $512,450 for married couples filing jointly. The top 37% rate kicks in above $640,600 single and $768,700 joint.
Households in the 22% or 24% brackets face the same mechanism, just at their own rate. A child’s excess unearned income lands wherever the parents’ next dollar would.
Wages From a Real Job Are Taxed Differently
Kiddie tax does not touch earned income. A teenager’s paycheck from a lifeguard shift, a restaurant job, or a paid internship is taxed at the teen’s own brackets and is largely sheltered by the dependent’s earned-income standard deduction.
The distinction matters because earned income is what unlocks a custodial Roth IRA. A kid with $4,000 in W-2 wages can contribute up to that $4,000 to a Roth in their name. Growth inside the Roth compounds tax-free and never trips the kiddie tax.
Realized Gains Only, and Mind the Wash Sale
A teen who buys and holds pays nothing until they sell. Only realized gains, dividends, and interest count. That alone is an argument for teaching a young investor to hold positions rather than day-trade them.
Active traders should know the wash sale rule applies to a custodial account like any other. Selling a losing position and rebuying the same security within 30 days disallows the loss for that year. A teen chasing setups can quietly rack up disallowed losses across a custodial and a Roth, because wash sales look across accounts under the same taxpayer.
Better Wrappers for Money You Want the Kid to Have
A UGMA or UTMA custodial brokerage account, the standard vehicle behind a teen’s Robinhood account, is the account that triggers the kiddie tax. Two alternatives sidestep most of it.
- Custodial Roth IRA. Requires the child to have earned income. Contributions can be withdrawn anytime; growth compounds tax-free. No kiddie tax on qualified distributions.
- 529 plan. Owned by the parent, not the child. Grows tax-free for qualified education expenses. Counts as a parental asset for financial aid, which is treated far more favorably than a UTMA counted as the student’s own asset.
Financial aid is the quiet cost of UTMA balances. Assets titled to the child are assessed more heavily on the FAFSA than parent-owned assets, which can shrink need-based aid packages even in years the family owes no kiddie tax at all.
Robinhood is where a growing share of this money now sits. The company rolled out custodial accounts as part of a family investing experience and was named broker and sole initial trustee for Trump Accounts, with CEO Vlad Tenev telling investors “seven million children have signed up” and roughly “1.5 billion” in contributions have already flowed in. That is a lot of custodial paperwork heading to families who have never seen a Form 8615.
Sorting the right wrapper for a child’s investment dollars is the kind of decision worth running with a CPA before the December brokerage statements arrive.
This article is for informational purposes only and is not tax, legal, or investment advice. Consult a qualified tax professional about your specific situation.
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