Tax Strategies With Kids: Credits, 529s, Custodial Roths and Hiring Your Kids

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: Kids unlock the $2,200 child tax credit, the dependent care FSA or credit, 529 plans, custodial Roth IRAs, the new Trump accounts and, for business owners, payroll-tax-free wages for children under 18. Stack them in that rough order, and watch the kiddie tax on investment income.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Raising a child to 18 costs a lot, and the tax code returns only a slice of it. But that slice is worth thousands per year if you use every piece. This guide is the overview: the credits you claim automatically, the accounts you choose to fund, and the strategies, like hiring your kids, that take more paperwork.

Figures are for 2026, as of October 27, 2026. For budgeting the whole cost of kids, see the cost of kids calculator and FIRE with kids. The full planning map is in the tax planning guide.

CPA Warning Label: Children are expensive, loud and occasionally sticky. The tax code knows this and offers partial compensation, in the form of six separate programs with six separate sets of rules.

Credits

The credits are the easy money, because they mostly require being a parent and filing a return.

Details: child tax credit, dependent care FSA vs credit and education credits. Also, head of household filing status, if you are unmarried with a qualifying child, gives a larger standard deduction ($24,150) and wider brackets than single.

529 and state deductions

A 529 plan is the main education account. Contributions are made with after-tax dollars federally, growth is tax-free, and withdrawals for qualified expenses are tax-free.

• Qualified expenses: college tuition, fees, books, and room and board for at least half-time students; up to $10,000 per year of K-12 tuition (the 2025 law expanded K-12 uses and raises this to $20,000 starting in 2026); apprenticeships; and up to $10,000 lifetime of student loan repayment.
• State deductions: many states give a deduction or credit for contributions, usually only to the home-state plan. A few allow any plan. The deduction is often worth 3% to 7% of contributions up to a cap, which is effectively a free return on day one.
• Gifts: contributions count as gifts to the child. You can front-load five years of annual exclusions ($95,000 per donor in 2026) with a Form 709 election. See gift tax annual exclusion.
• Leftovers: after 15 years, up to $35,000 lifetime can roll from a 529 to the beneficiary's Roth IRA, subject to annual IRA limits and earned income.
• Non-qualified withdrawals: earnings are taxed and hit with a 10% penalty, with exceptions for scholarships and some other events.

For FIRE families, a 529 also has a quiet benefit: parent-owned 529s are counted lightly in college financial aid formulas compared with taxable accounts.

Custodial Roth

If your child has earned income, from a job or your business, they can contribute up to the lesser of their earned income or $7,500 (2026) to a Roth IRA, held in a custodial account until they reach the age of majority in your state. You can give them the money for the contribution; it does not have to be the same dollars they earned.

Starting at 14 or 15 with a few thousand dollars a year can grow to a very large tax-free sum by retirement, because the money has 50-plus years to compound. Contributions (not earnings) can also come out tax- and penalty-free at any time, which makes the account a flexible starter fund. See the custodial Roth IRA guide.

Hiring your kids

If you own a business, paying your children a reasonable wage for real work can shift income from your high bracket to their low one.

• Income tax: a child's standard deduction covers earned income up to $16,100 in 2026, so wages up to that amount are generally free of federal income tax.
• Payroll tax: wages paid by a parent's sole proprietorship, or a partnership owned only by the parents, to a child under 18 are exempt from Social Security and Medicare tax, and under 21 from FUTA. Wages paid by an S corporation or C corporation do not get this exemption.
• Business deduction: the wage is deductible to the business, saving income and self-employment tax at your rate.

Documentation

• Real, age-appropriate work: filing, cleaning a rental, social media, modeling for your product photos.
• Pay at a reasonable rate, comparable to what you would pay a stranger.
• Timesheets, a job description, and payment into an account in the child's name.
• W-2 and payroll filings.

Audit caveat: the IRS and courts regularly disallow wages to young children with no records, or wages that are far above market. The strategy works because it is real employment; treat it that way.

Rental owners

Landlords with a rental business can hire kids for cleaning, landscaping and bookkeeping. See rental real estate tax strategies. Transferring rental property itself to kids is a different matter, covered in gifting rentals to kids and rental capital gains for kids.

Trump accounts

Starting in 2026, children under 18 with a Social Security number can have a Trump account, a new type of IRA for minors created by the 2025 tax law.

• A $1,000 federal seed deposit for U.S. citizen children born from 2025 through 2028, if a parent elects it.
• Contributions of up to $5,000 per year from parents and others, starting July 4, 2026, including up to $2,500 from an employer that is excluded from the parent's income.
• Investments limited to low-cost U.S. stock index funds.
• No withdrawals until the year the child turns 18; then the account generally follows traditional IRA rules.

Contributions from parents are not deductible, and earnings are taxed on withdrawal, so for a child with earned income, a custodial Roth is often better per dollar. The seed money and employer contributions, though, are free. See Trump accounts for children.

The kiddie tax

Putting investments in a child's name to shift income has limits. For 2026, a dependent child's unearned income above $2,700 (the first $1,350 tax-free and the next $1,350 at the child's rate) is taxed at the parents' rate. This applies to children under 19, and full-time students under 24. Custodial UTMA and UGMA accounts are also the child's property and count heavily in financial aid. See the kiddie tax and custodial accounts guide.

Mistakes to avoid

• Claiming the same child twice. Divorced or separated parents should agree in writing who claims each child, and use Form 8332 when the noncustodial parent claims.
• Paying a child through an S corporation and skipping payroll tax. The FICA exemption only applies to sole proprietorships and parent-only partnerships.
• Funding a custodial account you may need back. UTMA, custodial Roth and Trump account money belongs to the child, permanently. Do not use it as a parking spot for your own emergency fund.
• Ignoring state rules. 529 deductions, state child credits and state treatment of Trump accounts vary.
• Forgetting the birthdays. The child tax credit ends at 17, dependent care at 13, payroll exemption at 18, and the kiddie tax runs to 19 or 24. Put the dates on a calendar.

Illustration: a sample stack

A married couple with $220,000 of income, a side business and two kids, ages 6 and 15, might use:

1. Child tax credit: $4,400.
2. Dependent care FSA for the 6-year-old's after-school and camp: $7,500 pre-tax, saving about $2,200 of federal income and payroll tax (22% plus 7.65%), more with state tax.
3. 529 contributions to the home-state plan to capture a state deduction.
4. Hire the 15-year-old in the sole proprietorship for $8,000 of real work, saving the parents about $2,750 of income and self-employment tax (roughly $1,130 of SE tax plus 22% income tax), while the teen owes no federal income tax.
5. The teen contributes $7,500 to a custodial Roth IRA, funded by the parents as a gift.
6. Elect a Trump account for the younger child and take any employer contribution offered.

Total tax value: well over $10,000 a year, before 529 growth. Not bad for paperwork mostly done at the kitchen table.