Final answer:
The kiddie tax reduces the incentive for parents to shift income to their children by taxing the child's unearned income at the parent's tax rate instead of the child's lower tax rate.
Step-by-step explanation:
The kiddie tax is a provision that aims to reduce the incentive for parents to shift their income to their children. It is a tax law in the United States that applies to children under the age of 19 (or 24 if they are full-time students) who have unearned income over a certain threshold.
Under the kiddie tax rule, a child's unearned income above a certain limit is subject to the parent's tax rate instead of the child's lower tax rate. This prevents parents from transferring their high-income assets to their children in order to take advantage of their lower tax rates.
For example, let's say a parent earns a high income of $200,000 and has a child with unearned income of $50,000. If the kiddie tax was not in place, the child's income would be taxed at a lower rate compared to the parent's income. However, with the kiddie tax, the child's income would be subject to the parent's higher tax rate, reducing the incentive for income shifting.