Final answer:
A child's income will be taxed at the rates applicable to estates and trusts when it's subject to the "Kiddie Tax," which applies to a child's unearned income exceeding the annual threshold.
Step-by-step explanation:
The income of a child may be taxed at the rates applicable to estates and trusts in situations where the child's income is subject to the "Kiddie Tax." The Kiddie Tax rules were enacted to prevent parents from avoiding taxes by shifting large amounts of income to their children, who are typically subject to lower tax rates. Specifically, the Kiddie Tax applies to unearned income of a child above a certain threshold (which is adjusted annually for inflation). In 2021, for example, this threshold was $2,200. If a child's unearned income exceeds this amount, the excess is taxed at the estate and trust rates which are generally higher than individual tax rates. This includes income from interest, dividends, and other investment income. It's important for families to be aware of these rules when planning their taxes and considering transfers of wealth to minor children.