The Kiddie Tax

Sarah, age 16, is claimed as a dependent by her parents. In 2025, she earned $2,500 from a part-time job and received $6,000 in dividends from a custodial investment account her grandparents set up for her. Her parents have a marginal tax rate of 24%.

How will Sarah’s unearned income be taxed under the Kiddie Tax rules?

1. All of Sarah’s income will be taxed at her own tax rate.
2. The first $1,350 of her unearned income is tax-free, the next $1,350 is taxed at her rate, and the remaining unearned income is taxed at her parents' rate.
3. The first $2,500 of Sarah’s unearned income is tax-free, and the remaining amount is taxed at her parents’ rate.
4. Sarah’s entire unearned income will be taxed at her parents’ rate.