DEFINITION of 'Income Shifting'

A strategy of moving a person's income from a high income bracket or tax rate to a lower one. The most common form of income shifting occurs when an individual shifts a portion of their taxable income to their children, in order to take advantage of the lower tax rate at which their children are being taxed.

BREAKING DOWN 'Income Shifting'

The easiest method of shifting income to a child is typically to transfer funds or investment assets to a savings account or investment account under your child's name. The income from this account will fall into a lower tax bracket, as the child in most cases will not be making an income that would be applicable to higher taxation. One issue to be aware of, for parents looking to defer income to a child, is the "kiddie tax."

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