What is the tax rate on unearned income exceeding $1,900 for affected children?

The correct response relates to the tax treatment of unearned income for children, particularly in the context of the "kiddie tax." When a child's unearned income exceeds a certain threshold, specifically $1,900, the excess amount is not taxed at the child's tax rate but rather at the parent's tax rate. This provision is intended to prevent parents from shifting investments to their children's names to take advantage of the lower tax brackets typically available to minors.

In this instance, the kiddie tax applies because the threshold of unearned income is surpassed; thus, the tax on the unearned portion is calculated using the parent's tax rate, ensuring that the income is taxed at a level appropriate to the family's overall income situation. This policy aids in maintaining fairness in the tax system and discourages tax avoidance strategies that involve the allocation of income to children who may have a significantly lower tax liability than their parents.

Understanding this tax treatment encourages compliance and ensures that families are aware of their tax obligations when managing their children's unearned income.