Which tax is designed to prevent parents from shifting passive investment income to their children (and their children's lower tax brackets)?

Question

BlackTom AI · Accepted Answer

Begin by outlining the core concept the question targets: a tax rule aimed at limiting the ability of parents to shift passive investment income to children to take advantage of lower brackets.
Option 1: 'The Kiddie Tax' is designed precisely for this purpose. It treats a child’s unearned income (such as interest and dividends) above certain thresholds as taxable at the parent's tax rate, thereby reducing the incentive to shift investment income to children.
Option 2: 'The Alternative Minimum Tax (AMT)' is a separate framework that ensures high earners pay a minimum level of tax by adding back certain preferences and deductions. It is not specifically about shifting unearned income to children, so it does not address the Kiddie Tax concept.
Option 3: 'Self-Employment Tax' applies to net earnings from self-employment and funds Social Security and Medicare taxes for individuals running a business. It has nothing to do with parental shifting of children’s unearned investment income into lower tax brackets.
Option 4: 'The Net Investment Income Tax' (NIIT) is a 3.8% surtax on net investment income for high-income individuals. While it does touch on investment income, its purpose is not to curb income shifting to children but to collect tax on certain high-income investment income at the higher income level.
Across the choices, the only option that directly addresses the concern of taxing a child’s passive investment income in a way that limits parental shifting is The Kiddie Tax, which aligns with the described objective.

accy_505_120258_250069 Module 2 Practice Quiz

Which tax is designed to prevent parents from shifting passive investment income to their children (and their children's lower tax brackets)?

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