Understanding a Child's Tax Capacity - Birth through Age 13 - Kiddie Tax During the period from birth through age 13, a child's tax capacity is limited by the kiddie tax [IRC Sec. 1 (g)].  The kiddie tax is applied to the investment income (earned income is not subject to the kiddie tax rules) of a child under age 14 which exceeds $1,600.  The investment income is taxed at the parents' top tax rate, rather than the child's lower rate of 10% for ordinary income or 5%/15% for capital gains. One strategy for avoiding the tax is to invest the child's assets in securities or property that generates tax exempt income, or to defer income recognition until the child reaches age 14.  Examples of such investments include municipal bonds, Series I/EE bonds, growth oriented and tax efficient funds, QTP's and CESA's.   Return to Education Startegy