Question

Which of these are techniques of income shifting or splitting?

I. An installment sale of an income-producing asset from a parent to a child
II. Transfer of income-producing property from the grantor to a grantor trust
III. Valid employment of a child in the parent's business

A) I, II, and III
B) I and III
C) II and III
D) I and II

Answer 1

Option A is the correct answer. Techniques of income shifting or splitting include installment sales to a child, transferring property to a grantor trust, and employing a child in a parent's business, all aimed at reducing tax burden.

Step-by-step explanation:

The techniques of income shifting or splitting include the following:

1. An installment sale of an income-producing asset from a parent to a child, which allows for the income to be taxed at the child's, potentially lower, tax rate.
2. Transfer of income-producing property from the grantor to a grantor trust, where the trust is treated as the same taxpayer as the grantor for income tax purposes, but can shift income to beneficiaries in lower tax brackets.
3. Valid employment of a child in the parent's business, which can shift income from the parent to the child, who may be in a lower tax bracket.

All these methods can be used to effectively shift income and potentially reduce the overall tax burden, by taking advantage of different tax rates among family members or entities. Therefore, the answer is option A: I, II and III.