If you’re a parent, your dependent children can be a source of tax savings. There are the well-known provisions in the tax code, such as the Dependent Child Care Credit and the Child Tax Credit, but there’s also an opportunity to shift some taxable income to your children. Shifting income to your children works because the tax rate increases as your income rises. This provides an incentive to shift income to your lower-earning dependent children. Here’s how to leverage your children’s earned income.

Shifting income rules

In 2026, the first $1,350 of unearned income for each child is not taxed, and the next $1,350 is taxed at the child’s normally very low tax rate. Any earnings above $2,700 are taxed at the parent’s tax rate. Unearned income typically includes interest, dividends, royalties, and investment gains. As long as your child is under 18, or 24 if a full-time student, these rules apply.

Transfer enough income-producing assets to each child to approach the annual unearned income limits as closely as possible. Depending on your marginal tax rate, you could save as much as 37% on federal income taxes for the transferred amounts.

In addition to unearned income, consider investing in assets with long-term appreciation. This may help manage the timing and rate of capital gains taxes when selling the investment. For example, if you transfer assets in your child’s name and your child buys Amazon stock after the dot-com bubble for less than $10 per share. At age 25, the shares are worth $100,000+, but her first job out of college doesn’t pay much. So you sell a few shares of the appreciated stock and avoid capital gains tax altogether because of her lower income!

Remember that excess investment income may be subject to an additional 3.8% investment income surtax. Any investment income that can shift to your children could also save you this additional tax bite as well. However, moving assets from you to your children may affect their eligibility for college financial aid. Make sure to consider how your tax strategy affects college financing as they get older.

Leverage your children’s earned income

Wages your children earn are considered earned income. If you own a small business, finding ways to employ your children can be a way to shift income from your higher tax rate to their lower rate. Be careful, as you must be able to defend the work your child is doing and the amount they receive for that work. Some ideas include:

• Have your child clean your office a few times per week
• Put your child in charge of making local business deliveries
• Use your child in an advertisement for your business
• Have your child help assemble items or assist with mailings

Additional Tip: If you are a sole proprietor, you may hire your dependent children under age 18 and do not need to pay Social Security and Medicare taxes.

There are many opportunities to leverage the tax advantages of having children. Reach out if you would like help creating a plan for your family. Contact our RRBB advisors for more information or if you have any questions.