Project how a custodial account compounds, then see exactly how much the kiddie tax takes back. Enter a deposit, a monthly contribution, and a horizon to model the 2025–2026 tiers — the first $1,350 of a child's unearned income is tax-free, the next $1,350 is taxed at the child's 10% rate, and everything above $2,700 is taxed at the parent's marginal rate. Compare the result against a 529 plan and a taxable brokerage account.
| Year | Pre-Tax Balance | Kiddie Tax | After-Tax Balance |
|---|---|---|---|
| Run a calculation to see the projection. | |||
Situation: A grandparent funds a UTMA with $10,000 at birth and adds $200 a month for 18 years. Expected return is 7%, and the account distributes about 2% a year in dividends and realized gains. The parent's marginal rate is 24%.
Math: Contributions total $10,000 + ($200 × 216 months) = $53,200. Pre-tax value ≈ $121,270 using the formula. Each year's distributions land mostly in the first two kiddie-tax tiers, so the tax stays small — total kiddie tax across all 18 years is only about $357.
Situation: A 12-year-old earns $5,000 of unearned income (interest, dividends, and a small realized gain). The parent's marginal rate is 24%.
Math: Tier 1 = first $1,350 → $0 tax. Tier 2 = next $1,350 × 10% = $135. Tier 3 = $5,000 − $2,700 = $2,300 × 24% = $552.
Situation: Same $10,000 + $200/month over 18 years at 7%, parent rate 24%, taxable yield 2%.
Result: The 529 grows to ≈ $121,270 tax-free for qualified education. The UGMA/UTMA lands near $120,870 after the kiddie-tax drag but can be spent on anything. A parent-owned taxable brokerage nets roughly $113,810 after paying 24% on annual distributions — and still owes capital-gains tax on the appreciation at sale.
P = initial deposit
PMT = contribution per compounding period (monthly by default)
r = expected annual return (decimal)
n = compounding periods per year (12, 4, 2, or 1)
t = years. When r = 0 the formula reduces to P + PMT × n × t.
I = the child's unearned income for the year
First $1,350 = sheltered by the child's standard deduction — $0 tax
Next $1,350 = taxed at the child's own rate (10%)
Above $2,700 = taxed at the parent's marginal rate (the "kiddie tax")
| Unearned Income Band | Taxed At | Max Tax in Band |
|---|---|---|
| $0 – $1,350 | 0% | $0 |
| $1,351 – $2,700 | 10% (child's rate) | $135 |
| Above $2,700 | Parent's marginal rate | Varies (e.g. 24%) |
Applies to children under 19, or under 24 if a full-time student, whose earned income does not exceed half their support. Thresholds are indexed — $1,350 / $2,700 are the 2025 and 2026 amounts.
| Feature | UGMA | UTMA | 529 Plan | Taxable Brokerage |
|---|---|---|---|---|
| Eligible assets | Securities & cash only | Broader — real estate, insurance, collectibles | Plan-selected investment menu | Anything the broker offers |
| Annual tax on growth | Kiddie tax on distributions | Kiddie tax on distributions | None while invested | Parent's rate on distributions |
| Withdrawal tax | Capital gains on sale | Capital gains on sale | Tax-free for qualified education | Capital gains on sale |
| Control transfers at | Age of majority (18–21) | State-specified, typically 18–25 | Never — owner keeps control | Never |
| Use of funds | Anything for the child | Anything for the child | Qualified education only | Anything |
| FAFSA treatment | Student asset — up to 20% | Student asset — up to 20% | Parent asset — up to 5.64% | Parent asset — up to 5.64% |
Project raw growth, isolate the kiddie tax on a set amount of unearned income, or run all four account types head-to-head.
Uses the actual $1,350 tax-free amount, the $1,350 band at the child's 10% rate, and the $2,700 parent-rate threshold.
Custodial assets are assessed at up to 20% of value, versus up to 5.64% for a parent asset — a gap worth thousands.
Compare asset eligibility, withdrawal tax, and control-transfer ages before you commit a single dollar.
A custodial account is an irrevocable account an adult opens and manages for a minor. Two laws govern it: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). With both, the money belongs to the child from the moment it is deposited — a completed gift under the annual gift-tax exclusion of $19,000 per donor per beneficiary in 2025 (or $38,000 for a married couple electing gift-splitting). Control transfers at the age of majority and is permanent.
The practical difference is what the account may hold. UGMA accounts are limited to stocks, bonds, funds, and cash, and terminate at the age of majority in every state. UTMA accounts can hold real estate, partnership interests, and tangible property, and the termination age varies — most states let the donor choose between 18 and 25.
Securities and cash only. Terminates at the age of majority (18 in most states). Simpler, older statute, and the default in many states.
Wider asset menu — real estate, insurance products, collectibles. Termination age is set by state law or the donor, typically 18–25. Adopted by almost every state.
The kiddie tax, created by the Tax Reform Act of 1986 and codified at IRC §1(g), stops parents from sheltering investment income in a child's low bracket. Instead of taxing a child's unearned income at their own rate, it splits it into three tiers:
The rule applies to children under 19, and to full-time students under 24 whose earned income does not exceed half their support. A custodial account's dividend stream is therefore largely sheltered while the balance is small — but as it compounds toward college, distributions climb past $2,700 and the parent's rate starts to bite. This calculator models that drag year by year.
The biggest hidden cost of a custodial account is the financial-aid formula, not the kiddie tax. Under the FAFSA methodology a custodial account is a student asset, assessed at up to 20% of value. A parent-owned asset is assessed at up to 5.64%. A $50,000 custodial account can therefore cut need-based aid by roughly $10,000 a year, while the same $50,000 held by a parent would reduce aid by only about $2,820.
That matters because of what college costs. For 2024–25, the average published price of a public four-year in-state school — tuition, fees, housing, and food — ran about $24,920, and a private nonprofit four-year school ran roughly $58,600. Four years at the public figure is close to $100,000; the private figure approaches $234,000.
A 529 plan avoids the aid penalty and the annual tax entirely. Withdrawals are tax-free for qualified expenses: tuition, fees, books, supplies, required equipment, room and board for at least half-time students, computers and internet access, special-needs services, up to $10,000 a year of K–12 tuition, and up to $10,000 of lifetime student-loan repayment. The trade-off is that a custodial account has no restrictions on what the money can buy, and it belongs to the child outright.
⚠️ Disclaimer: This calculator provides educational estimates only and is not tax, legal, or financial advice. The kiddie-tax thresholds ($1,350 tax-free, next $1,350 at the child's rate, above $2,700 at the parent's rate) are the 2025–2026 federal figures and are indexed annually; actual tax depends on the child's filing status, the parent's marginal rate, and whether the election to include the child's income on the parent's return applies. State tax, the net investment income tax, and capital-gains treatment are not modelled. Custodial termination ages vary by state, and the after-tax projection assumes taxable distributions equal to the yield you enter. Verify all figures with a qualified tax professional before making decisions.