The unearned income of a child (above an exempt amount) is taxed at the rates of:

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BlackTom AI · Accepted Answer

The question asks about how the unearned income of a child (above an exempt amount) is taxed.
Option 1: Their parent. This is correct under the Kiddie Tax rules, where unearned income of a dependent child is taxed at the parent’s marginal tax rate (or, if higher, at the trust/estate tax rate). The intent is to prevent shifting unearned income to a child to take advantage of the child’s lower rate, by applying the parent's rate in most cases.
Option 2: Trusts and estates. This is not the standard treatment for a dependent child’s unearned income; trusts and estates have their own tax rate structure, which is typically used when the income is actually attributed to a trust or to an estate rather than directly to the child.
Option 3: The tax rate of the child. While it might seem intuitive to tax the child at their own rate, under Kiddie Tax rules the child’s unearned income is not taxed at the child’s own rate in most cases; instead, it is taxed at the parent’s marginal rate (or the higher trust/estate rate). This option reflects a common misconception about how young dependents’ investment income is treated for tax purposes.
Option 4: C-Corporations. This is incorrect because corporate tax rates apply to corporate entities or to dividends/allocations received by individuals from corporations, not to a child’s unearned investment income in the context of Kiddie Tax rules.
In summary, understanding Kiddie Tax is key here: unearned income of a child above the exempt amount is taxed using the parent’s marginal rate (or the higher trust/estate rate), not at the child’s own rate, not at a trust/estate rate by default, and not at corporate tax rates.

accy_505_120258_250069 Module 2 Practice Quiz

The unearned income of a child (above an exempt amount) is taxed at the rates of:

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