It is a technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets. What is it?
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The technique described in the question is known as income shifting, which involves transferring income from a higher tax bracket individual to a lower tax bracket individual, typically a family member. The purpose of income shifting is to minimize tax liability and reduce the overall amount of taxes owed by the higher tax bracket individual.
Income shifting works by transferring assets or income-producing activities to a lower tax bracket individual, such as a spouse or child, who then pays taxes on the income at a lower rate than the higher tax bracket individual would have paid. For example, a high-income earner may gift appreciated stock to a child who has little to no income. The child can then sell the stock and pay a lower capital gains tax rate, which may be zero, 15%, or 20%, depending on the child's tax bracket and the amount of gain realized.
While income shifting is a legal tax planning technique, it can be subject to scrutiny by tax authorities if it is perceived as a means of tax evasion or tax avoidance. To avoid potential issues, it is important to follow all relevant tax laws and regulations and to ensure that the transfer of income or assets is done for valid reasons and not solely for the purpose of reducing taxes. It is also advisable to seek the guidance of a qualified tax professional before engaging in any income shifting strategies.