Question

Which one of the following choices describes an income-shifting tax planning strategy?

A) Accelerating the recognition of income.
B) Deferring the recognition of income.
C) Shifting income from a high-tax-rate taxpayer to a lower-tax-rate taxpayer.
D) Eliminating income through deductions.

Answer 1

An income-shifting tax planning strategy involves shifting income from a high-tax-rate taxpayer to a lower-tax-rate taxpayer to minimize tax liabilities and maximize post-tax income.

Step-by-step explanation:

An income-shifting tax planning strategy involves shifting income from a high-tax-rate taxpayer to a lower-tax-rate taxpayer. This can be done by transferring assets or income-producing activities to the lower-tax-rate individual or entity. By doing this, the high-tax-rate taxpayer can reduce their tax liability as the income is now subject to the lower tax rate. This strategy is commonly used to minimize tax obligations and maximize overall post-tax income.

For example, a high-income earner with a top tax rate of 35% may transfer investment assets to their child who is in a lower tax bracket of 15%. This effectively shifts the income from the higher tax rate to the lower tax rate, resulting in significant tax savings.