Question

Tax Planning - Income Shifting (Taxable Income/Tax Liability) (LO. 7)

Leroy and Amanda are married and have three dependent children. During the current year, they have the following income and expenses:

Salaries $120,000 Interest income 45,000 Royalty income 27,000 Deductions for AGI 3,000 Deductions from AGI 9,000

(Hint: The standard deduction for married filing jointly is $24,400.)

General instructions: (1) Do not round intermediate computations. Round your answers to the nearest dollar. (2) Ignore tax credits when calculating tax liability. (3) Refer to the tax rate schedule to calculate the following.

a.	Leroy and Amanda's 2019 adjusted gross income (AGI) is $ _______ taxable income is $_______ and their 2019 tax liability is $_______

b.	Leroy and Amanda would like to lower their income tax. How much income tax will they save if they validly transfer $5,000 of the interest income to each of their children? Assume that the children have no other income and that they are entitled to a $1,050 standard deduction. Leroy and Amanda will save $ ________if they legally transfer $5,000 of interest income to each child.

Answer 1

a) Leroy and Amanda’s 2019 adjusted gross income (AGI) is $189000, taxable income is $164600 and their 2019 tax liability is $27929

Gross income
Salaries	120000
Interest income	45000
Royalty income	27000	192000
Deductions from AGI		(3000)
Adjusted gross income		189000
Deductions from AGI
Greater of:
standard deduction	24400
or
itemized deductions	9000	(24400)
Taxable income		164600
Tax liability (9086+(22%*(164600-78950))		$27929

b) Leroy and Amanda will save $2115 If they validly transfer $5,000 of interest income to each child.

Leroy and Amanda’s taxable income will decrease to $149600 ($164600 - $15,000) and their tax liability will be $24629 (9086+(22%*(149600-78950)), a $3300 reduction. Each child’s taxable income will be $3950 ($5,000 - $2100) and the tax will be $332 ((2600*10%) + (24%*(2900-2600)) per child, a total tax of $996 ($332 x 3). Leroy and Amanda will save $304[$27929 - $25625 (24629+996)]. If they validly transfer $5,000 of interest income to each child.