What tax applies to a child's unearned income at the tax rates of trusts and estates?

The Kiddie Tax is a provision designed to prevent parents from shifting income to their children in order to take advantage of children's lower tax rates. Under this rule, any unearned income a child receives that exceeds a certain threshold is taxed at the rates applicable to trusts and estates, which are typically higher than the rates for individual taxpayers.

This means that if a child has unearned income, such as dividends, interest, or capital gains, beyond a specified dollar amount, the excess income will be taxed at a higher rate as established for trusts and estates. The Kiddie Tax aims to simplify the tax calculation for families and limit the tax benefit of shifting investments to children.

The other options do not correctly identify the tax applied to a child's unearned income. The Dependent Tax is not an established term related to a specific tax concept. The Child Tax Credit provides a credit against tax liabilities but does not pertain specifically to taxing unearned income. The Investment Income Tax typically relates to additional taxes on high-income earners, but it is not specific to the taxation of a child's unearned income.